Frontier CEO Discusses Q3 2010 Results - Earnings Call Transcript

| About: Frontier Communications (FTR)

Frontier Communications Corporation (NYSE:FTR)

Q3 2010 Earnings Call

November 8, 2010 9:00 AM ET


Gregory Lundberg – Director, Investor Relations

Maggie Wilderotter – Chairman and CEO

Don Shassian – Chief Financial Officer

David Whitehouse – SVP and Treasurer


Scott Goldman – Goldman Sachs

Batya Levi – UBS

Michael Rollins – Citi

Simon Flannery – Morgan Stanley

Chris King – Stifel Nicolaus

Gray Powell – Wells Fargo

Chris Larson – Piper Jaffray

Frank Louthan – Raymond James


Please standby, we are about to begin. Good day, everyone. And welcome to the Frontier Communications [Second] Quarter 2010 Results Conference Call. This call is being recorded.

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

Gregory Lundberg

Thank you, Alan. Good morning, everyone. The purpose of this call is to discuss 2010 third quarter results for Frontier Communications, which were released this morning and are available on our website, including the supplemental information. If anyone needs a copy of the materials please contact Lisa Lombardo at 203-614-5064. We anticipate the Form 10-Q will be filed later this week.

On today’s call are Maggie Wilderotter, Chairman and Chief Executive Officer; Don Shassian, Chief Financial Officer; and David Whitehouse, Treasurer. During this call we’ll be making certain forward-looking statements, in particular and 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’ll 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 third quarter 2010 results for Frontier Communications Corporation. We’re excited to be reporting our first financial results as the new Frontier, following the completion of our July 1st acquisition of Verizon properties. We know that you’ve all been waiting patiently for these numbers and we believe that the wait has been worthwhile.

Frontier’s third quarter results demonstrate the improvements that are already happening in the acquired properties, our confidence in our business plan and the strong and steady results in our legacy business. In Q3 2010, Frontier realized synergies of $63 million in the acquired properties. This is a $252 million annualized rate and was achieved from the elimination of corporate overhead costs and other wage and non-wage synergies.

Looking forward, this permanent reduction along with continued synergy realization, gives us confidence to raise our 2013 synergy run rate estimate by 10% to $550 million. This positive lift to our synergy target is on top of a very solid quarter as the new Frontier.

Our Q3 revenues were $1.4 billion and adjusted operating cash flow or EBITDA of $671 million that represented a strong margin of 48%. We converted this into free cash flow of $339 in the third quarter and paid 55% of this to our shareholders as dividends.

Consistent with our position since we first announced the Verizon transaction, Frontier is successfully managing a business three times its former size in terms of revenues and employees. We believe this success is being driven by strong leadership, a focus on customer sales and retention and by implementing our local engagement model in all new markets.

In the four months that we have owned the acquired properties we have laid a solid foundation for the future business. We manage Frontier’s business internally by focusing on three key drivers of value for our company, people, products and profits. Managing the business this way differentiated Frontier’s legacy business this quarter by driving improved customer metrics, rising ARPU and strong margins.

Let me start with people. As I mentioned, our employees tripled in number at closing and implementing cultural change has been one of our primary missions. Our senior leadership team has met with every one of our employees over the past few months and I have personally met with 11,000 new and legacy Frontier employees, since closing.

Our people are energized and engaged in the Frontier mission and values. They’re truly owners of the company because on July 1st we made every employee a shareholder of Frontier. This gesture linked our legacy and new employees together. All employees are working toward the same three goals, keep and grow access lines, accelerate high-speed Internet deployment and growth, and implement local engagement to enhance the customer experience. Everyone from our call center reps to field technicians knows that these goals will improve the results of our business, sustain jobs and communities, and build on our foundation of quality, reliability and trusted interactions with our customers.

Some examples, we’ve looked at processes and procedures and eliminated what’s unnecessary. This basic blocking and tackling has a big positive financial impact. We have deployed local area managers to our new markets, majority of these managers were trained by Frontier well before close. They now have access to daily sales and retention customer activity that they never had before to help them run their business. You can’t know how you’re doing if you don’t have daily reports on customer gross adds and deactivations.

All 7,000 technicians in our new markets now report to their local area managers, not to a distant centralized group. These technicians are doing full installations for high-speed, keeping two hour appointment windows and will resolve any technical problem a customer experiencing. Each tech is trained to handle voice, high-speed Internet and any other issues pertaining to our network for both business and residential customers.

We have also revamped customer service processes to be more customer-centric. Hours have been expanded to include evenings and weekends. Reps are measured on first call resolution and sales for the first time and all reps now have customer save tools. We have eliminated work that is non-value added and as a result of all of these changes, call transfers are down over 10% and we’re outsourcing 12% less calls to third-party vendors.

Our next step is to train all customer service reps on all customer issues. Once this training is complete in 2011, we will have all Frontier customer service reps as universal reps. Again, this streamlines our service delivery, eliminates transfers and will reduce outsource dependence.

Shifting to product. Frontier’s product goal is to be the provider of choice and increase the number of products that residential and business customers take from us. To achieve this, we are constantly innovating with price simplification and new products and services.

Our newly acquired markets also require an investment to improve the quality of existing services and to increase broadband availability. With these steps, communicated to the customers through local engagement, we expect to drive down churn in the acquired properties and to expand reoccurring customer revenues.

Some examples, Frontier increased broadband availability to over 30,000 homes and businesses in the third quarter. We plan to enable more than 300,000 total homes by year end. Together, this will take broadband availability from 64% at closing to over 70% by year end.

Our network upgrade projects are being implemented in every market. In addition to increased high-speed availability, we are also enhancing speeds and capacity. In Q3, our overall 6-megabyte availability increased from 43% to 50%. All new Frontier markets are now selling new double and triple plays along with value added services like peace of mind. In the past four months, we also completed the huge task of converting a 100% of customer e-mail accounts from to

Finally, Frontier just introduced custom value pricing in our legacy markets and in West Virginia. The concept allows customers to build their own bundles by mixing and matching any voice, video or data service. The more they buy, the more they will save with discounts up to 15% on all products and services purchased.

Profit, when we execute on people and products, profit follows because our customers pay us for value and as we have demonstrated in our legacy markets, they will buy more products. To align our employees with the company’s goals we’ve rolled out new performance and compensation metrics in the new markets. These metrics include revenue per customer, number of products the customer takes, retention of access lines and high-speed services and capital efficiency.

Some examples, our Take the Lead program, which rewards employees for referring sales of Frontier products and services generated 3,000 leads in July, 4,300 leads in August and 5,500 leads in September. In commercial sales, the legacy business is strong and West Virginia has built steady momentum in small, medium, enterprise and carrier sales.

In the 13 states, we’re hiring over 50 new sales account positions, our equipment sales initiative is ramping as well in all markets. The wireless backhaul outlook is for double-digit growth and we’re making process improvements in commercial sales and service activities.

Commercial business and residential broadband revenues represent 60% of our total revenue base, which is clearly a positive shift away from access line revenue dependence. Our integration team which did a phenomenal job in West Virginia has been redeployed and is focused on the conversion plan for the remaining 13 states from the current Verizon systems on to our Frontier system.

As I mentioned on the second quarter call, the West Virginia conversion went very well, the best conversion we’ve ever done. And we delivered these results on a very specific time schedule. All of the billing cycles went out on time, call volumes are now back to normal, answer times are on plan and other operational metrics are in line with our legacy Frontier market levels.

Financially, we are in a solid position with a safe and attractive annual dividend of $0.75 per share. We remain committed to our investors and we are committed to improving our cash flow from the acquisition. We are off to a good start but we have a lot more to do.

I look forward to reporting continued progress to you next quarter. On that note, I will now hand the call over to Don Shassian, our Chief Financial Officer, who will give you the financial overview for the third quarter of 2010. Don?

Don Shassian

Thank you, Maggie and welcome everyone. I’m very excited to be reporting our financials to you today. Our third quarter results are a great kickoff to the new Frontier and today’s synergy number and raised guidance should give you comfort that we can dramatically change the cost structure of the acquired properties while growing revenues and investing in future capabilities of the network.

Before we go into the numbers, I want to point out that our discussion is going to focus primarily on the combined company. However, we are providing a supplemental schedule filed via 8-K today and available on our website that’s similar to the pro forma data we filed in September. In that document, you will find supplemental line item details broken out for Q3 between legacy Frontier and the acquired properties.

Also, our further review and analysis of acquired properties has led us to restate some of the customer-operating metrics to conform to our data reporting standards. This comment relates to high-speed and video subscriber counts only.

I’d like to begin today with customer trend and working the revenues of profitability before turning to capital spending and the guidance. Please note that our Q3 2010 earnings per share includes the after tax impact of merger and integration costs.

Our adjusted EPS excluding these costs was $0.08. Frontier’s Q3 2010 customer revenues of $1.2 billion reflects stabilized customer loss rates in residential and improved customer loss rates in business. Access line losses improved this quarter as compared to Q10 2010 -- Q2 2010 with annual line loss rates of 6% for legacy Frontier, 10.9% for the acquired properties and 9.3% on a total company basis.

On the residential side, our legacy business demonstrated improved customer losses as compared to both Q2 2010 and Q3 2009. On the acquired side, residential customer loss performance was weaker on a sequential basis, but reflected improvement over Q3 2009. Our local engagement tactics, promotions and broadband build-out are expected to slow the rate of residential access line losses in the next year.

Both legacy and acquired properties showed increasing products per customer and average revenue per customer. On a combined basis, residential ARPU increased 3.4% over last year’s pro forma third quarter to over $58.

In our business segment, Frontier’s 381,000 customers generated a $533 average revenue per customer per month, helping drive $611 million of revenues, down only 2.7% from pro forma Q3 2009 and only slightly less than pro forma Q2 2010.

Our legacy business revenues were slightly positive year-over-year while the acquired properties were down 4.3%, an improvement from the 6.3% loss rate in 2010. We believe our increased focus on business customer, especially in the acquired properties through our local engagement model, will have a positive impact on this important part of our business.

For Q3 2010, business revenues represented 49% of Frontier’s total customer revenues. Data and Internet services revenues of $453 million, declined sequentially, reflecting $2 million improvement in legacy business and $12 million decline in acquired properties.

The HSI net subscriber losses in the acquired properties improved sequentially and we had a positive net adds in legacy similar to last quarter. Since a large portion of our high speed build-out in the new territories was weighted toward the end of Q3 and we are aggressively expanding our HSI [build availability threat] Q4 as Maggie mentioned, we expect our high-speed net adds to continue to improve and turn positive over the next several quarters.

Switched access and subsidy revenues were just 11.5% of Frontier’s total revenues in the quarter. Looking back at Q3 2009, this was 12.9% on a pro forma basis and legacy Frontier was 17.3%. As you can see the acquired properties have decreased our reliance on this revenue category.

We are pleased to report that cash operating expenses of the acquired properties were $479 million in Q3 2010. This $63 million sequential reduction from the prior quarter represents our synergies realized in the elimination of the corporate, administrative and common costs incurred by the properties we acquired.

Several wage and non-wage cost reduction initiatives also commenced during the quarter. On the legacy side, our cash expenses increased slightly due to pension and benefit costs, overtime and marketing expenses of specific legacy business.

On a pro forma basis, our EBITDA margin expanded from 45.7% in pro forma Q2 2010 to 47.9% this quarter. An adjusted EBITDA grew 2.5% sequentially to $671 million. It is a small step but a very strong step in the right direction for the combined companies.

Turning back to synergies, the $63 million in cost savings in the acquired properties represents the sequential three month comparisons of costs incurred under our management as compared to the cash operating expenses reported by Verizon in their last and final set of financial reports for June 30.

This $63 million level, $252 million on annualized basis and represents more than 50% of our original $500 million target. I will also remind you that our synergy estimates do not include any assumptions relative to revenues.

The savings already achieved through the elimination of the corporate administrative and common costs coupled with identified expense savings initiatives presently being implemented gives us great comfort in raising our 2013 synergy target by $15 million with total run rate of $550 million.

We expect to realize annualized cost savings of $300 million by the end of 2010, $400 million by the end of 2011 and $550 million by the end of 2012. Approximately, 30% of these synergies were driven by non-wage savings in network and IT operations.

Capital expenditures in Q3 were $159 million or 11.3% of revenues excluding $16 million of integration CapEx. The level of spending in the acquired properties increased throughout the quarter as we deployed broadband.

Total spending in the acquired property was $105 million for the quarter or 11.8% of revenues. Capital expenditures in the acquired properties did increase throughout the third quarter and will be substantially higher in Q4 as we increase our broadband and network deployment initiatives.

Our capital expenditure forecasts have remained consistent with previous guidance provided at approximately 12% of annual revenues plus $100 million of additional spending per annum for three years. We will give full 2011 guidance during our Q4 2010 conference call in February.

As for revised full year 2010 expectations, we believe that our capital expenditures excluding integration CapEx will be between $500 million and $525 million. Our adjusted free cash flow will be between $830 million and $860 million and our cash taxes will be between $40 million and $50 million, which reflects the benefits of bonus appreciation.

Please note that the CapEx forecast reflected very sizable increase in Q4 as our broadband expansion network improvement are in full swing. At September 30, 2010, our leverage ratio was 2.84 times, net of cash and restricted cash. Frontier generated $339 million in adjusted free cash flow and paid dividends of $186 million or a payout ratio of 55%.

Please note that this CapEx increases in future quarters for our broadband expansion, specifically for example, in Q4, our payout ratio will increase. In the future, the capital expenditure decreased and our revenue initiatives and our cost saving are fully realized, our dividend payout ratio would significantly improve to at or below 50%.

As Maggie stated earlier, we are very committed to maintain your 75% annual dividend. We are also committed to lowering our leverage to 2.5 times or below, which we continue to believe is achievable for the combination of EBITDA improvement and/or debt reduction. At this time, we expect residual free cash flow to build on a balance sheet and are not contemplating any near-term changes to share buyback or dividend policy.

In summary, we’re very pleased to be able to report these solid Q3 financial Q as the new Frontier, results show the beginning of the turnaround that we’ve committed to you. We know that this turnaround and our achievement of further cost savings is key piece of new investment thesis. We hope that you look back on this long year and take comfort that we’ve done what we’ve said we’re going to doing.

From regulatory approval and conditions, the financing and closing of transaction, the West Virginia system conversion, as we move our focus to converting a next states, we can expect continued delivery of solid legacy results and a notable improvement in the acquired properties.

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

Question-and-Answer Session


(Operator Instructions) And we’ll take our first question from Scott Goldman at Goldman Sachs.

Scott Goldman – Goldman Sachs

Good morning. Thanks. Obviously, the strong start to the synergy number in the quarter, just wanted if you could talk a bit about what areas provided the greatest benefit in the quarter, which is a function of eliminating some of the headcount that was brought on in the second quarter, kind of unexpectedly? And then as you think about the raising the guidance, may be talk a bit about what area has helped drive that increasing guidance?

And then secondly, just wanted to touch quickly on margins both within legacy Frontier and SpinCo, we had a pretty good step down looks like in the legacy markets to about 51% margin, I wondering if this is tie to expenses on West Virginia after some other incremental cost we should be thinking about?

And then conversely on SpinCo, a very nice improvement there, is that really driven by some of the synergies that we’re talking about before or, there are incremental expenses that are being eliminated on that side? Thanks.

Don Shassian

Scott, the savings for the quarter for the most part came from the elimination of the corporate admin and common costs that were previously being reflected in the financial numbers of these acquired properties. And so that has all been achieved, substantially the largest amount of that $63 million for the quarter.

There are over 75 initiatives that we had in-house that are being worked on to reduce cost savings over the next several years. Some of the really larger ones are on the network side. We are migrating the backbone to our backbone, to eliminating circuit costs, very substantial migrating long distance from one carrier to another, also very substantial. We’re rationalizing some vendors that they are using versus what we’re using, trying to consolidate the spending and there’s a host of other activities that are going on, all very -- gives us a lot of comfort to raise the guidance.

I think some of the real push for us is on the network side as Dan McCarthy and his team were looking at the network side before even closed and we’re planning on, what we were going to do with the network. We were seeing a little bit more savings than we anticipated out of the gate and sort of gave us some comfort to raise it up and feel very comfortable with that.

The second question on the margins, on legacy, on legacy side there were some costs for the quarter that were higher than normal. Overtime was quite high. There were a lot of storms in a number of our regions which caused a lot of higher overtime than we normally have this time of year. And also we did have increased pension contributions, cash pension contributions of $5 million this quarter over last quarter which will drop down significantly for next quarter.

So there’s a little bit of some one-timers if you would. West Virginia has really been culled out of that. We’re reporting to you, West Virginia, in the acquired properties so the step-up in legacies from a couple of areas that should be for the most part one-timers and we should be able to get the margins back up next quarter. And in the acquired properties, improvement is really trying to -- its expenses kicking in, savings kicking in as well as revenues being pretty solid.

Maggie Wilderotter

The only thing I would add on the synergy side is, if you think about how we run the business, again, we tripled the size of the company. We took over all of these new markets and we didn’t add one dime of cost to our overhead as a company to run those markets. That’s a big difference in terms of how Verizon was running those markets versus us.

And I agree with Don. I think if you look at our legacy margins, I think you will see a bounce back in the fourth quarter because we did have a lot of one-time issues in the third quarter.

Scott Goldman – Goldman Sachs

Great. Just one quick follow-up on the synergy side. I appreciate you guys giving guidance on a per year basis on that front. Are there certain milestones or maybe, you can kind of help us frame what expectations you’ve put in for when the set of billing conversions may come into play?

Maggie Wilderotter

We are actually working on that plan as we speak. We are very committed to move as fast as possible to move the other 13 states on to our systems. We would expect in 2011 to convert the first, probably four states and we are -- we have the exact same team that worked on West Virginia, now working on that stalled plan.

And if you think about it too, since all of these systems are on the same platform, once we get through the first four states, the balance of the states are a bit more cookie cutter because we’re not redoing the conversion software, it’s simply the database conversion management side.

Scott Goldman – Goldman Sachs

Great. Thanks, guys.


(Operator Instructions) We’ll take our next question from Batya Levi at UBS.

Batya Levi – UBS

Okay. Thanks. I had a question, a follow-up on the synergy question. I think your internal synergy target was higher than the original $500 million you gave out. Are you still comfortable with that or is the new updated figure more realistic target going forward and maybe a question on the revenue side. The revenue miss versus our estimates came mostly from lower regulatory revenues from the acquired properties. Can you talk about if there were any one-timer in there or what drove the down side? Thanks.

Don Shassian

Batya, on the internal targets, yeah, internally we have a higher number. We’re shooting for internally on synergies and we are pushing the envelope and everyday trying to find ways to continue to achieve those. So we are still maniacally focused on delivering higher cost savings than what we’re publicly talking about. We raised the guidance publicly because we have a very, very clear line of sight for the 550 and so therefore it’s the best thing to be able to give guidance to folks externally.

Your question on the regulatory revenue on the acquired properties, the only response I really can give is it comes from -- I believe on the switch side. Switched access appears to be a little bit lower than we anticipated. We are continuing to look at all of that information to make sure that we are billing for everything we should be billing for. And it really is a -- the changeover from pre-closing to post-closing, there may be a little bit of bumps and bruises there. We’re still looking at it. But it really is on the switched access side.

Batya Levi – UBS

Okay. Great. Thanks.

Don Shassian

Thank you.


We’ll take our next question from Michael Rollins of Citi.

Michael Rollins – Citi

Hi. Good morning and thanks for taking my questions. Just one follow-up, I was wondering if you could size the one-time items that happened in the third quarter that may not have been normalized out of the OIBDA that was presented, just to give a sense of magnitude in terms of how to think about that margin impact.

And then secondly, in relation to the acquired entities, if you could talk a little bit about what you see from an enterprise or business markets and how that differs or similar to the markets that you run and as part of that, what the opportunity is going into 2011, where employment seems to be stabilizing, maybe growing a little bit, can you talk about the influence to the totality of revenue from that segment? Thanks.

Maggie Wilderotter

Hi, Mike. I’m going to have Don take the first question on the one-time items and then I’ll talk a little bit about what we’re doing on the business side.

Don Shassian

Michael, the increase in the pension contribution is about $5 million for the quarter. And that will step down next quarter and the overtime and some other benefit costs, could be in magnitude of $3 million. So it could be approximately, ballpark, $8 million, maybe a little bit less than that but that’s the best ballpark I would give you.

Michael Rollins – Citi

That’s really helpful. Thank you.

Maggie Wilderotter

On the business and enterprise side, again, we’re still digging into all of this, Mike. But I will say that there is less share in the acquired markets than we have in our legacy markets. We definitely own business in all of our legacy markets. We think there is more upside opportunity in the acquired markets. We have really done a full-court press in West Virginia, since we did the conversion and we are seeing wins on a daily basis in that market place from a growth in business perspective.

In addition to that, there are a number of the acquired property markets where there are wireless backhaul opportunities that we’re working on as well. So, we are extending the sales team as I mentioned. We’re hiring over 50 new salespeople throughout the acquired markets. The local engagement model with our local general managers meeting with businesses on a day-to-day basis, is really changing the game in those markets and we are packaging our product sets differently to not only have day-to-day capabilities from a voice and data perspective, but also CPE projects in all of those markets as well.

So we are very optimistic on the business side. We think there’s a lot of room for growth and we are starting to see traction across the board continuing in our legacy markets but also in the new acquired properties as well.

Michael Rollins – Citi

Thanks a lot.


(Operator Instructions) We’ll take our next question from Simon Flannery at Morgan Stanley.

Simon Flannery – Morgan Stanley

Thanks very much. Good morning and thanks for the additional disclosure, very helpful. Maggie, can you talk about the sort of the reputation, the service quality, where are you on rebranding the SpinCo properties with Frontier and any early signs of sort of changing trajectory of things like customer satisfaction?

And then we’ve had a change in Washington last week. Any updates on your expectations for things like USF inter-carrier comp reform and any new thoughts from your Washington contacts? Thanks.

Maggie Wilderotter

Hi, Simon.

Simon Flannery – Morgan Stanley

Good morning.

Maggie Wilderotter

We’ve been very focused on branding in the new markets. We have been very quick from a signage perspective, all of our trucks we’ve been converting over to Frontier. We look at those as billboards all around our markets. The web, we have changed the branding on all of the websites and have really pushed web in a number of those markets with our customer base. We’ve had a series of communications out to the customer by mail.

Again, reinforcing who we are and what we’re doing and we’ve used a new brand called the conversation company as a way to increase dialogue between us and our customers. And to also facilitate dialogue between our customers and the people that they care about that they want to communicate to. So we’ve done a lot in the markets from a branding perspective. I think the good news is we’ve had a lot of press coverage on Frontier.

We have a good reputation and as you recall, we do business in every one of the states that we acquired, except for three new ones. And in those new ones we’ve actually put more focus on branding because our name is not as well-known in those states. But we do believe that we have come on strong from a branding perspective in these markets to really change the game of being about customers and customer service and a focus on customers versus -- Verizon has not been doing much in those markets from an advertising or engagement perspective over the last several years.

I think the other good thing for us is the competitors in all those markets are used to a Verizon lethargic approach to competition. That’s not how we do business. So we’re really trying to step up the game too with local engagement to change that paradigm and to really drive customers to call us or to communicate with us And especially new customers or win-backs and we have a number of initiatives going on in those markets through the end of the year to really drive communication and promotions to the win-back customers in those markets.

We have, as I mentioned, changed a number of things that we’re doing from a customer service perspective to make that a better experience for the customer and we think that will drive better customer satisfaction rates and -- on a monthly basis continue to do customer satisfaction surveys in the new markets as well.

Shifting over to Washington, D.C. I was actually in DC about two weeks ago. I had lunch with the Chairman of the FCC. I spent some time at the Whitehouse and on the hill. I do think with this election, there’s a chance for a reset for some of the initiatives that have been talked about in Washington that would affect our industry, specifically net neutrality and also inter-carrier compensation and universal service reform.

One of the negatives that happened is, Rick Boucher, who I think all of us knew as a pretty level-headed Congressman who was one of the leaders in driving for universal service reform and inter-carrier comp reform was defeated. I do think that Julius Genachowski will sort of pick up the mantel on that, though and will look to get a proposed rule making sometime in 2011 on universal service and inter-carrier comp. Whether they’ll swallow the whole issue or break off certain pieces of that that are more although-hanging fruit remains to be seen. But I think they’ll be rational and open and transparent in the process.

And we truly believe any change in universal service funding and inter-carrier compensation would be positive for our company, no doubt about it, because there’s a lot of things broken in that system. I also would think that the net neutrality debate, I’m not sure if the FCC will go forward with the Title II light. I think that remains to be seen. But I think there will be more pressure on them if they try do that now with a Republican House.

So we’re going to learn a lot I think over the next several weeks once the lame duck session starts to really see what will be on the docket, but again, I don’t think anything will happen for our industry until we’re into 2011.

Simon Flannery – Morgan Stanley

Great. That’s very helpful, Maggie. Thank you.


(Operator Instructions) We’ll l take our next question from Chris King with Stifel Nicolaus.

Chris King – Stifel Nicolaus

Hi. Good morning. Thank you for taking the question. I think most of mine have actually been answered but just one -- most of them have been asked and answered. One thing I wanted to follow up on though, I guess, to follow up on Simon’s question. Just was wondering if you could talk a little bit or provide some color with respect to the high-speed Internet business as well as the FiOS business and the legacy of Verizon territory, obviously were down a little bit there from a DSL standpoint as expected and the legacy Verizon properties.

Just was wondering if you see a path in the near term to getting back to growth on the DSL side in the Verizon assets and then how you think about FiOS now going forward having a quarter of it under your belt, any dramatic changes to Verizon’s marketing efforts or are you pushing that any harder in those properties than what Verizon was doing?

Maggie Wilderotter

Hi, Chris. So if you think about the high-speed DSL in the acquired markets, when we took over, if you recall in the second quarter they lost over 11,000 DSL customers. So we started pretty much in the hole with these markets. We actually improved that loss by 45% in one quarter. So just like anything else, when you’re trying to turn an aircraft carrier, it takes a lot of effort to drive the momentum in a different direction.

In addition to that and just taking over those markets, it took us some time to do the planning as to where we were going to expand high-speed DSL in those markets, so the momentum of build-out didn’t start until late in the quarter, in September more so than July and August. So, we do believe that we’ll see better momentum in the fourth quarter and into first quarter next year as we continue to do more aggressive build-out which gives us an opportunity to build on the momentum that we’ve already started.

We also found in the FiOS markets -- if we think about FiOS we think about it in two parts ,you think about broadband and you think about video. And one of the policies that Verizon had in how they managed those markets is they would not offer a customer who was in a FiOS neighborhood DSL service.

Now, FiOS starts at like 50 MEG and it’s very expensive. It’s like $50 a month for a customer. So they left a whole host of customers behind from an affordability perspective who didn’t need that kind of capability on broadband. We have just over the last 30 to 60 days opened up DSL in all of the FiOS markets to give the customer choice. So the customer can choose whether they want FiOS broadband or they want high-speed Internet service, typically, and in those markets we’re offering around 6 to 7 MEG as the entre point.

In addition to that, we’re also offering in the FiOS markets the choice of DirecTV or FiOS video. Again, we come from a paradigm of choice for customers. We think that customers should be able to choose what kind of video they want. We have aggressive offers in the market for both DirecTV and for FiOS video, but in our vernacular, what we care about is keeping the customer, getting the customer to take more products and services from us and making sure the customer is happy with the choice points.

So we’ve made a number of changes throughout all of these markets in terms of policy. Another good example is we’ve opened up in many of these locations the opportunity to sell high-speed service up to 95% capacity on the equipment that we have out in the field. Verizon had set a parameter at 75%.

So again, we’re opening up more opportunities which we also think will change the paradigm shift in the numbers for high-speed overall. With regard to the FiOS video product, we are still evaluating it from a financial perspective and a customer perspective, and from a cost perspective and a revenue perspective.

In terms of what that does for us overall, what it does for churn, how much does it really cost to extend this capability in the markets that we’re in today, and we think that -- that analysis and evaluation will go on through the first quarter and then we’ll be able to make some choice points in terms of was we want to do with FiOS from an expansion perspective or a maintenance perspective.

Don Shassian

One other item, if I may add, on a question on high-speed. As Maggie mentioned in her comments at the beginning, by the end of the year we’re going to be increasing availability over 300,000 homes. That’s one data point, so obviously more homes should be able to sell to. We started these properties. We’re 64% availability. We’re committed to get them to 85%.

Going from 64% to 85% is an incremental -- over 800,000 homes are going to have broadband. So increasing promotions, incentives and just a bigger population to sell to is certainly going to help us go with positive net adds on high-speed going forward.

Maggie Wilderotter

It also provides an opportunity for us to sell double and triple plays, where today we don’t have that opportunity in many of these markets. And if you take the four or five states out of the equation we’ve got a number of markets with very low accessibility for broadband today. So we are really scrambling to get that as high as we possibly can, as soon as we possibly can. I wish we could turn it and snap our fingers and have it to be different, but we still think it’s going to take us a couple quarters to really get where we need to get to.

Chris King – Stifel Nicolaus

Thanks and congratulations on all the integration achievements.

Maggie Wilderotter

Thank you, Chris.

Don Shassian

Thanks, Chris.


And moving on we’ll take our next question from Gray Powell with Wells Fargo.

Gray Powell – Wells Fargo

Good morning. Thanks for taking my questions. Just have a few. Have you guys seen any change in competitive intensity from your cable competition? And then can you just give us an update on what the current cable overlap is?

Don Shassian

On competitive side, I think we have seen in the past three months is an increase in advertising and marketing. We haven’t seen anything irrational. We haven’t seen crazy promotions. We have seen some very strong increase in advertising and marketing. There are a couple of pockets where there have been some gift card giveaways that are occurring but there -- nothing is going to increase in advertising and marketing, pretty solid.

Maggie Wilderotter

I would also say on the intensity side, we have, as Don said, we’ve seen it in mostly the FiOS markets, not in the acquired properties that have DSL. We also, right after close, we saw some intensity in West Virginia but that’s backed down. So, we know the cast of characters. It’s the same ones that we deal with on the legacy side, the two primary competitors for us are Comcast and Time Warner throughout this footprint. And the cable overlap, I don’t know, Don, if you have the exact numbers.

Don Shassian

Comcast is about 32% of the homes, Time Warner’s about 23%, Charter is below 15% and then it drops off, everybody else from there.

Maggie Wilderotter

We have a lot of [mom and pop] too in a number of these markets that we’re competing.

Gray Powell – Wells Fargo

Okay. That’s very helpful. And then how should we think about your ability to improve access line trends in the Verizon region, and get those losses down to sort of legacy frontier levels? And should we expect any significant promotions in your markets for the holiday season?

Maggie Wilderotter

We are continuing to work on reducing access line losses. I think, as you saw in the third quarter, we started to make a dent in that. There are a number of things that we have to do in order to get there. Our goal would be to get to 8% line losses. That’s what we’re focused on.

And I think it starts with having high speed service as a component of what we sell to the customer. It’s also about improving network quality. We have a number of areas where the voice network quality is not where it needs to be and we’ve jumped on that. So we’re making some dramatic improvements to the network throughout the footprint.

We are also talking about the value of our phone service and communicating that through advertising as well as promotions in the marketplace. It’s about improved customer service in these markets. And, it’s about selling bundles and getting customers on price protection plans. I think, as you know, in our legacy markets, 96% of all of our sales are on a price protection plan and we have close to 60% of our residential customers on a one-, two- or three-year price protection plan. That number is below 15% in the acquired markets.

So we’re also driving for price protection plans with every sale that we’re doing in these new markets as well. So, again, there’s a number of push points that we have to do to get the access line losses in line where they need to be. Again, it doesn’t happen overnight, but we are pleased with the progress that we’ve made so far.

Gray Powell – Wells Fargo

Okay. Thank you very much. Very helpful.

Maggie Wilderotter



Moving on, we’ll take our next question from Chris Larson at Piper Jaffray.

Chris Larson – Piper Jaffray

Thank you for taking the question. Just, Don, a clarification? You said $8 million or so for fourth quarter cash pension contributions. How much was that in the third quarter? And then looking ahead to 2011, any sense for what the cash contribution might be, and if you could remind us the status of the SpinCo pensions and where they are in terms of funding? Thank you.

Don Shassian

The cash contribution in Q3 was $5 million, above what we gave in Q2, so it should be dropping down substantially more in Q4. Not $8 million to – there’s upper five. Our total contribution in 2010 is going to be approximately $13 million. 2011, it looks like it could be upwards of $40 million to $50 million for the year.

The acquired properties’ pension plan will be coming across with assets equal to the projected benefit obligation. We’ve received, as per the contract, 80% of the assets already and we’ll be receiving the balance sometime in 2011 as all the calculations for various plans, some are over-funded, some are under-funded today. That’s a pretty complex calculation to be done, but all those assets will be received in 2011. Hopefully that helps.

Chris Larson – Piper Jaffray

That’s very helpful. Thank you.

Don Shassian

Thanks, Operator, one more, please?


Certainly. We’ll take our final question from Frank Louthan at Raymond James.

Frank Louthan – Raymond James

Thank you. You have a pretty steep ramp for the broadband adds in the fourth quarter. Can you give us an idea of how you go from 30,000 in the first quarter and then adding another 270 in the last three months, particularly with more difficult winter build season? Maybe give us an update on what technically you’re doing that, and maybe where you were, the trend through the end of October?

Maggie Wilderotter

Hi, Frank. I think it’s momentum that we built upon from the third quarter that accelerates into the fourth quarter. So the 30,000 we turned on in the third quarter were basically turned on in September. Right? And so, October and November will be big months for build all the way through the middle of December.

And it’s not just about building new, but it’s also about going out and we’ve looked at every single area from a local engagement perspective, to see where we have excess capacity that we can put into existing equipment and turn on neighborhoods that actually have more capacity, but just based upon policy that Verizon had in place, they wouldn’t sell to additional customers in those areas. So we have a very different philosophy that we’ll be creating about turning broadband on for customers, and so a number of the homes that we’re turning on don’t require us to add more capital. It’s simply changing policy.

A good example is, even if you look at the DSL choice points in the FiOS markets, that’s several hundred thousand homes over probably the next year that we could have access to that we didn’t have access to before. So, we feel pretty confident that we’ll get to that 300,000 level and we’re trying to push too as much this quarter, because January, February, March are tough months to build. So the more we can front-load into the fourth quarter, try to hit some of those homes with promotions during the holiday season, allows us to continue to sell to that capacity into Q1 where we won’t be able to build as aggressively.

Frank Louthan – Raymond James

Okay. That’s helpful. Thank you. And can you give us an idea of your thoughts on aspirational gifts and some of those promotions you’ve done in your legacy territories, in the Verizon territory? I am sure you don’t want to give away anything to competitors, but any thoughts on that? Have you begun any of those programs and do you have an idea what their PC penetration is in those territories versus your legacy properties, any additional opportunity there where you think folks just haven’t signed up for DSL because they don’t own a computer?

Maggie Wilderotter

It’s a great question, and I don’t want to give competitors a leg up. But I think it is fair to say that you will see us do aspirational gifts. There are some -- there’s some gifting that we’re going to look for from a promotional perspective in the fourth quarter in certain markets where we do know that PC penetration is low and we want to stimulate that market in a different way. I think you will also see us do more in 2011 with aspirational gifts, more from a national perspective in locations as we refine where the PC penetrations are lowest in these new footprints. So, we’re doing that work right now as we speak.

Frank Louthan – Raymond James

Great. Thank you.

Maggie Wilderotter

Well, thank you very much. I appreciate everybody taking the time to be with us on this call. This is a very big quarter for us as we put our arms around these new properties. We are making good progress as I mentioned in my script.

We have a long way to go. There’s still a lot more for us to do, but I would say we are excited and we are enthusiastic about the opportunity, both from a cost synergy perspective and a revenue upside perspective and we’ll look forward to continuing to communicate with you as we make progress.

Thanks again, and we’ll talk to you next quarter.


And that does conclude today’s conference. We thank everyone for their participation.

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