Frontier Communications (FTR) Daniel J. McCarthy on Q2 2016 Results - Earnings Call Transcript

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Frontier Communications Corp. (NYSE:FTR)

Q2 2016 Earnings Call

August 01, 2016 4:30 pm ET

Executives

Luke T. Szymczak - Vice President-Investor Relations

Daniel J. McCarthy - President, Chief Executive Officer & Director

John M. Jureller - Chief Financial Officer & Executive Vice President

Analysts

Batya Levi - UBS Securities LLC

Matthew Niknam - Deutsche Bank Securities, Inc.

Gregory Williams - Cowen & Co. LLC

David William Barden - Bank of America Merrill Lynch

Frank Garreth Louthan - Raymond James & Associates, Inc.

Simon Flannery - Morgan Stanley & Co. LLC

Brett Feldman - Goldman Sachs & Co.

Philip A. Cusick - JPMorgan Securities LLC

Operator

Please standby. We are about to begin. Good day, everyone, and welcome to the Frontier Communications Second Quarter 2016 Earnings Conference Call. This call is being recorded.

At this time, I'd like to turn the call over to Mr. Luke Szymczak. Please go ahead, sir.

Luke T. Szymczak - Vice President-Investor Relations

Thank you, Angela, and good afternoon. Welcome to the Frontier Communications second quarter earnings call. My name is Luke Szymczak, Vice President of Investor Relations. With me today are Dan McCarthy, President and CEO and John Jureller, Executive Vice President and CFO.

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 cautionary language regarding forward-looking statements found in our earnings press release and SEC filings. On this call, we will discuss GAAP and non-GAAP financial measures as defined under SEC rules. Reconciliation between GAAP and non-GAAP financial measures is provided in our earnings press release. Please refer to this material during our discussion, and review the cautionary language concerning non-GAAP measures in our earnings press release.

Let me now turn the call over to Dan.

Daniel J. McCarthy - President, Chief Executive Officer & Director

Good morning and thank you for joining Frontier's second quarter 2016 earnings call. This is a very significant and successful quarter for Frontier. Today, in addition to talking about the progress we have made during the quarter, we will update you on our strategy and operational plans going forward, review our synergy attainment within the quarter, and share our outlook.

Please turn to slide three. I am particularly pleased to announce that following the successful cutover of the newly acquired assets, we achieved annualized integration cost synergies of $1 billion in the second quarter. This is a substantial outperformance relative to our original day one target of $525 million. We have also raised our total synergy target to $1.25 billion, which is considerably above our prior $700 million target.

We are particularly pleased that EBITDA from the acquisition met our expectations. Revenue for these assets was lower than anticipated as a result of a number of factors that John will discuss. But because of increased synergies, EBITDA remained in line with expectations. We have been very disciplined in our approach to operating the new markets. This included maintaining customer pricing and keeping promotions in line with those that Verizon offers in these markets.

Furthermore, we are utilizing retention offers similar to Verizon's and we are managing the normal promotional expiration cycle well. The net result of these actions is illustrated by the relative stability of the revenue we achieved after Frontier became the owner of the new properties.

As we have discussed on our last call, during the cutover period, we temporarily suspended acquisition marketing activities. This resulted in an expected slowing in gross additions. We are now back to a typical level of marketing in the new properties and all customer service calls are now being handled domestically. As a result, we have seen an improvement in gross adds and expect this to reach normalized levels as we continue through this quarter.

Turning to the commercial segment in the new markets, we have begun to implement our plans to build our direct and indirect commercial sales channel strategies. We expect to see traction in these channels in the fourth quarter timeframe. As we focus on building our marketing programs in the consumer and commercial segments, we expect to drive revenue and free cash flow. We have also continued to execute our broadband network upgrade program in both existing and new markets. This program will result in the expansion of 50 megabits or higher broadband capability to 2 million homes over the next year.

I will discuss these exciting plans in more detail later in the call. With the full quarter of combined results, we also have narrowed our guidance range for this year, which John will discuss in more detail towards the end of our prepared remarks. And finally, we continue to be focused on cash generation as illustrated by our common dividend payout ratio of 49% of free cash flow in the quarter.

Please turn to slide four. Before we get into the details of the quarter, I'd like to take a moment to remind you of how well we are positioned moving forward. With the doubling of our size, Frontier now has the scale, technology, and diversification to realize significant opportunities across our newly expanded footprint. At the same time, we remained committed to our disciplined capital allocation strategy, including maintaining our sustainable attractive dividend and delivering value to shareholders driven by recent strategic acquisitions and operational execution.

Please turn to slide five where I will discuss in more detail our plan to drive higher shareholder value from our significantly larger base of assets. We are expanding our revenue opportunities by transforming our network capabilities and creating a long-term competitive advantage. In many of the non-FiOS areas, this will be first-time customers will have the ability to choose a competitive Internet service product, and we expect to see strong demand for these new capabilities. Our primary focus will be increasing broadband penetration and offering customers opportunities to access the new speeds and capabilities we will introduce.

In addition, we will be offering a full suite of business solutions for the SME segment with expanded distribution channels. Within the FiOS markets, we have a very strong brand image and a product offering. We will continue to upgrade speeds and capacities to these markets to maintain our superiority of data and video offerings. And we believe we have further opportunity for market share gains.

On CAF II build remains underway and we are on track to bring higher speed capabilities to an additional 750,000 households over the coming years. Although the minimum speed in CAF II markets will be 10 megabits, many of these households will be served with higher speeds as we deploy the same leading-edge technology that is allowing us to improve the speed in our existing footprint.

Our expansion of video service to new portions of our existing service territory is moving along very well. We expect to have video availability to about a half a million additional households by the end of this year. As we upgrade different markets in the new territories, we expect to introduce our Vantage TV product. This means that many non-FiOS areas in the new markets will become Vantage TV enabled. As a result, our expansion of video will ultimately exceed the initial three million households previously announced.

Our plans to upgrade broadband capabilities in the new markets and to introduce video creates a significant opportunity for revenue growth. The builds are extremely capital efficient and certainly far more capital efficient than the broadband and video upgrades undertaken by peer companies in the past. When complete, we will have great networks and capabilities in these markets and will have created them at a capital intensity consistent with current guidance levels. On the commercial side, we are in the process of introducing distribution channels in the new markets. In addition, we are implementing our wholesale and retail product strategy with a focus on solutions for both FiOS and copper markets.

Please turn to slide six. As we have promised, our revenue mix has been transformed as a result of this transaction. In doing so, we have dramatically increased our exposure to growing profitable market segments while reducing exposure to residential voice which is down to just 14% of our revenue base.

Furthermore, wireless backhaul is now less than 3% of revenue and will present less pressure going forward. As you consider our new broadband and video initiatives, they should result in higher growth of these categories over time and you all understand why we are so excited about the potential for revenue trends to improve going forward.

Please turn to slide seven. As we have completed our initial cutover efforts in the new properties, we have refocused the organization to develop plans to upgrade our speed offerings in our existing footprint and have begun to execute upgrade plans for the copper-based service in the new markets. The first phase of this upgrade will be accomplished over the coming quarters and will raise speeds in these upgraded areas from 7 megabits to 50 megabits to 100 megabits. Following the upgrade, we will commence marketing and offering speed upgrades to current customers in these areas.

In our current markets, we continue to invest in our network and in our management and provisioning platforms to expand higher speed products. We expect to upgrade approximately 1.5 million homes to higher speeds over the next year. The combination of our plans to upgrade both the current and new markets improves our speed profile to approximately 2 million households. Following completion, over 40% of our households will be capable of receiving speeds in excess of 50 megabits. These upgrades improve a full 14% of our households passed and provides a very competitive service offering. As we continue to develop our priorities for the new markets, we will update you on our deployment plans. The introduction of these new capabilities and the incorporation of the video capabilities in these markets using our Vantage TV platform provides a tremendous opportunity to offer a differentiated product set in areas that haven't had many competitive options.

In summary, I'm very pleased with the transition from integration to normal operations in the new markets. We have begun acquisition marketing and expect normal gross add levels to return over the coming quarter. We are also beginning to harvest the benefits in our existing markets from the system upgrades and enhancements needed for our Verizon integration efforts. As we pursue the revenue growth opportunities, we will also focus on improving our cost structure and realize the additional $250 million of cost savings over the next three years.

And now, I'll turn the call over to our Chief Financial Officer, John Jureller.

John M. Jureller - Chief Financial Officer & Executive Vice President

Thank you, Dan. Please turn to slide eight, where I'll start by going through key financial highlights. Second quarter revenue was $2.61 billion, up from $1.36 billion in the first quarter with the acquisition of the new markets driving the substantial increase. We had a net loss to common shareholders of $80 million or $0.07 per share. Adjusted EBITDA of $1.03 billion represented a margin of 39.6%. We generated free cash flow of $250 million after payment of dividends on the preferred stock.

Please turn to slide nine. The second quarter revenue of $2.61 billion included $1.33 billion from the existing markets, down from $1.36 billion in the first quarter. Within our existing markets, the trend in residential is solid with revenue down less than 1% sequentially, reflecting a full quarter benefit of the improved average revenue per customer, or ARPC, including from the roll-off of the Connecticut acquisition promotional pricing over the course of Q1 and Q2. We did see a sequential decline in business revenue, mostly driven by a decline in wholesale including wireless backhaul.

Adjusted operating expenses in Q2 in the existing markets improved by $6 million sequentially to $821 million. Adjusted EBITDA was $505 million for a margin of 38.1%. In terms of the new markets, the adjusted EBITDA of $527 million and a 41.2% margin met our expectations. With our superior performance in addressing the cost base of the acquired business offsetting the starting revenue received for the historical Verizon's Separate Telephone Operations, or VSTO, business.

Please turn to slide 10. Let me take you through the revenue progression, or jump off, as the acquired business came under our operational domain. It's important to have an appropriate starting point for these new markets and understand the results from activity under Frontier's ownership. We previously filed information with the historical VSTO financial performance. Today, we filed the same VSTO information for the first quarter of 2016. This information shows revenue of $1.394 billion in Q1 prior to any adjustments.

Now, let's go through the revenue walk. First, as in previous filings, there was a pro forma adjustment for a minor amount of revenue and the reclassification of bad debt expense, a total of $16 million in that quarter. Second, upon closing, there was another $25 million of allocated revenue with no net impact to EBITDA that did not transfer. Third, we made certain strategic decisions to not take on contracts and customers that, while generating approximately $48 million in revenue, collectively resulted in a material improvement to our EBITDA.

Next, there were approximately $26 million of temporary impacts to revenue, those that will recover, the largest being the accounting adjustment for deferred customer installation revenue, the suspension of late fee charges for this transitional quarter and minor customer outage credits. Finally, we had only a modest $9 million decline in revenue from operations under our ownership, notwithstanding, as we communicated, the hold on marketing efforts directed at new customer acquisition.

For the last item under our control in the period, you'll not that there was an overall improvement to EBITDA in the quarter, reflecting a well executed program of managing the roll-off of expiring promotional pricing for customers in the acquired base. In total, we recorded $1.282 billion of revenue in the quarter for the new markets. This does include approximately $12 million in additional regulatory revenue related to the CAF II increment above the historical frozen support levels in California and Texas for the pre-closing period as per our arrangements with Verizon. Excluding this amount, one should consider $1.27 billion as the starting point for measuring our Q3 results.

Please turn to slide 11. Our customer trends for the existing markets showed improvement in Q2. Our residential customer churn decreased to 1.7% from 1.8% and broadband net additions increased 3.5% to 25,500. We anticipated that as we rollout greater speed capabilities in the existing markets and increase the availability of video, our net addition trend should be further enhanced, both through improved gross additions and reduced churn. As we had anticipated and previously communicated, broadband net additions were negative in the new markets.

Let's turn to slide 12 for a further look at the activity in the new markets in the quarter. These charts disaggregate the net changing gross additions and deactivations for the period. As we discussed last quarter, our plan was to suspend new customer acquisition marketing during Q2. As a result, our FiOS gross adds in Q2 reflected a natural rate of customer inbound calls as there was no assistance from outbound marketing. This intentional reduction of gross addition activity accounted for the large reduction in net adds in Q2. We did it to free our technicians and call-center reps to focus on existing customers during the transition.

With the transition behind us, we have begun our marketing programs in Q3 and would expect a return to normal levels of FiOS gross adds over the course of the second half of the year. Our disconnect rate in Q2 was elevated slightly, which is to be expected during such a transition but was not materially above the level experienced by Verizon in these markets in Q2 2015. This reinforces that the net customer add result in Q2 was the result of fewer gross adds and not an elevated level of churn among existing customers. Non-FiOS net adds were also negative but within the historic trend that Verizon has had over the recent quarters. We expect this trend to continue until we get the upgraded non-FiOS equipment into the field enabling service. Over time, we anticipate that our non-FiOS net adds will turn positive as a result of our planned broadband upgrades.

Please turn to slide 13. We are very pleased that we are able to achieve $1 billion in annualized cost synergies in Q2. This is a $400 million increase above our prior day one expectations or an incremental $100 million per quarter. Improvements came from cost to support the non-transferring allocated revenue and from the strategic decisions we made as we described in the revenue walk. Other amounts were a direct outcome of leveraging the further productivity and network improvements we decided to make, which were enabled by the higher one-time integration spending. The net of all of our integration activities in implementing the operating structure to support the acquired business is shown on slide 14.

In total, we are raising our cost reduction estimates to $1.25 billion to be achieved by the end of year three. This incremental $250 million above our day one achievement will be spread across both our existing business as well as the new markets. We are developing action plans for implementation of additional initiatives and are confident that these will be achieved.

Please turn to slide 15. In our existing markets, we achieved average revenue per customer, or ARPC, of $63.05 in the second quarter, representing an increase of $0.41 from the first quarter. There were several drivers of this increase with the most important being the benefits of the expiration of promotional pricing in Connecticut. Additionally, we have the return of snow-bird customers in the Northern markets, the continued migration of customers to higher speed broadband tiers, and growth in Frontier Secure. These items were partially offset by the continued decline in voice connections. On a combined basis, our ARPC was $83.20. The ARPC in the new markets is $110.30 because of the strong contribution of the FiOS Triple Play customers.

Please turn to slide 16. Frontier's cash flow remains very healthy, capital expenditures were $350 million in the second quarter, and we spent an additional $36 million in CapEx related to integration activities. Our adjusted free cash flow was $250 million in the second quarter. Our dividend payout ratio was 49%. On July 26, the board declared a common dividend of $0.105 per share for the third quarter of 2016 payable at September 30 in line with expectations. We will also be paying the regularly scheduled dividend on our preferred shares on September 30.

Please turn to slide 17. Our leverage ratio at the end of Q2 was 3.71 times, which is the trailing 12 month pro forma to reflect the inclusion of the Verizon transaction and $1 billion of the annualized cost synergies. We would expect the modest increase in the net leverage ratio as we roll forward over the next three quarters. This is due in part to the CAF II true-up amounts that we recorded in the third and fourth quarters of 2015. Thereafter, as we've indicated, we see the balance sheet deleveraging by 0.1 turns to 0.2 turns per year beginning in 2017.

Frontier's liquidity position remains robust. We ended the quarter with approximately $1.4 billion in cash and credit availability. Our debt is well laddered, and we have the ability to comfortably manage our debt maturities coming due over the next few years. Frontier's capital allocation framework remains unchanged. We will invest appropriately in our network infrastructure and operations, support our current dividend, and utilize the remaining cash flow to reduce debt and our leverage ratio. We are committed to maintaining our liquidity and reducing our leverage over time.

Please turn to slide 18. Now that we have completed our first quarter of operating our new markets, we have updated our 2016 guidance ranges. We anticipate the full year 2016 adjusted free cash flow to be in the range of $825 million to $900 million, this includes the contribution from only three quarters of California, Texas, and Florida. We anticipate capital expenditures of $1.275 billion to $1.325 billion in 2016, inclusive of our CAF II related expenditures and excluding integration spending. We estimate full year cash taxes will be a net refund of $10 million to $20 million. Going forward, over the next few years, we are currently estimating cash taxes to be near zero, with a substantial benefit being derived from the tax basis step-up negotiated as part of our transaction with Verizon. We estimate cash pension contributions for 2016 of $10 million to $15 million. We estimate that 2016 reported interest expense will be in the range of $1.53 billion to $1.55 billion, interest expense increased sequentially in Q2 from the first quarter by about $13 million net, reflecting the drawing of the Term Loan A at the end of quarter – at quarter end to fund the acquisition and the interest related to the debt we assumed from Verizon at the closing. We estimate that interest expense including the Q1 portion of interest expense on the $6.6 billion of acquisition related debt will be in the range of approximately $1.34 billion to $1.36 billion. Finally, looking forward, we are currently estimating that full-year 2017 adjusted EBITDA will be over $4 billion.

In summary, Frontier's Q2 2016 operating results, our opportunities with the California, Texas, and Florida acquisition, our prudent capital investments and expense management, all provide a strong cash flow base and a solid financial platform for supporting and investing in the business. We have ample capital to invest in and enhance our competitive infrastructure, service our debt, and comfortably sustain our dividend and maintain a dividend payout ratio superior to others in the telecom sector.

I will pass the call back to the operator, who will open up the line for questions.

Question-and-Answer Session

Operator

Thank you.

Luke T. Szymczak - Vice President-Investor Relations

Angela, we're ready if there are questions.

Operator

We will go first to Batya Levi with UBS.

Batya Levi - UBS Securities LLC

You – can you please provide more color on what you mean by return to normalized levels in gross adds for the acquired properties? In your legacy footprint, broadband adds are still very strong. Should we expect a return to that level for that footprint? And do you think that we can – for the combined company, can we see broadband adds return to positive in the second half of this year? And maybe along with that, you did mention that it was mostly a gross add issue and 2.2% churn was similar to prior periods. Can you maybe quantify what the change was and how has that trended in July, can we see a bit of improvements in the churn in the acquired footprint as well? And I have a follow up.

Daniel J. McCarthy - President, Chief Executive Officer & Director

Batya, your initial part of the question was cut-off a little bit, but I think you were really asking about the broadband results and the new properties as well as the legacy properties and when we might expect for them to return to normal?

Batya Levi - UBS Securities LLC

Right.

Daniel J. McCarthy - President, Chief Executive Officer & Director

So, first on the legacy side, we were very pleased with the results in this quarter. We are seeing similar results and we're expecting those results to stay stable as we go through the remainder of the year. When you look at the new properties, I think you had characterized it correctly, as we described it, it was a gross addition issue. There were some, a little bit higher churn that was associated with the cutover, but really nothing worse than we had described before. We started acquisition marketing on July 1. As you can imagine, you don't just turn on marketing and you start to get similar levels of gross additions as, what, a well-primed program, I think, going for a multiple years. So we're building right now. And with the current trajectory, we think by the end of the third quarter, we'll be at normal run rates. And the one caveat I would just add is that the copper markets in the new areas are really in the same condition as what we've inherited. So, while we do the upgrades, you should expect the trends in those areas to remain similar to the past. And then, as we upgrade them as we said 500,000 homes to higher speeds, we hope to change the trajectory there and that would really be a big contributor to the new markets, net broadband positive going forward.

Batya Levi - UBS Securities LLC

Got it. Thanks. And the other question is on your guidance. The prior guidance had a pretty wide range in terms of CapEx and free cash flow, and I assume that that was mostly related to the timing on when that capital will be spent. Now, that it's tighter, you maintained the midpoint of the free cash flow guide, but CapEx is slightly lower and taxes are – actually, it's the refund now that helps. What does that imply in terms of, I guess, EBITDA slightly lower than you had expected, even though second quarter came in kind of in line with your expectations, is it a timing of the incremental synergies coming in or do you expect more spending like you mentioned on the marketing side to offset that? Can you talk a bit of that implied EBITDA guidance change?

John M. Jureller - Chief Financial Officer & Executive Vice President

Hey, Batya. So, yeah, if you look at the midpoint of the revised range as compared to what we laid out, we're actually pretty much on top of the EBITDA number, which would imply about a $3.6 billion EBITDA at the midpoint of the range for the entire year. We will begin to pick up, as Dan said, marketing expense in the third quarter and in the fourth quarter. But at the same time is we're going to start to realize other of our cost synergies during the cost of the quarter. So, I think there'll be a good balance, and we're very comfortable with that. As we're exiting the year and head into 2017, our opportunity set is in excess of $4 billion of EBITDA for the full year.

Batya Levi - UBS Securities LLC

Okay. Maybe just to clarify that $4 billion number for next year, as well, is it – I mean you – I'm sure, people will ask if its rounded up, $3.5 billion-plus is the number that you're thinking about, can you provide a bit more guidance maybe in light of this year's EBITDA?

John M. Jureller - Chief Financial Officer & Executive Vice President

It's – Batya, this is not rounded-up, we believe it's $4 billion-plus, and we are developing our forward-looking projections in our budgets over the next month or two months, specific around those. But we feel confident at the $4 billion-plus level.

Batya Levi - UBS Securities LLC

Okay. Great. Thank you.

Operator

We will now go to Matt Niknam with Deutsche Bank.

Matthew Niknam - Deutsche Bank Securities, Inc.

Hey, guys. Thank you for taking the question. Just two on integration. One, just trying to figure out if there are any unresolved integration issues to be aware of, and whether we should expect any sort of a lingering churn elements into the third quarter for the CTF markets? And then just on synergies, can you just give us a little more color on where the increased synergies, both achieved and expectations came from? Thanks.

Daniel J. McCarthy - President, Chief Executive Officer & Director

Yeah, Matt, on the synergy side, we had invested very heavily in our IT platforms to mitigate any potential functional gaps that existed from an automation perspective and those investments really were very aggressive and we had – we didn't know that we were going to be able to accomplish all of that prior to close. Our team did an excellent job and, as a result, our cost structure that we had first estimated could be improved just by further levels of automation.

I would say one of the bigger bang for the buck on the synergies too was our engineering team rethought the architecture for a certain component of the data network for these properties. As they executed on that, it caused a little bit more expense and a little bit more CapEx from an integration perspective but it was a substantial increase in synergies that was associated with moving to the new architecture. Those were probably two of the biggest improvements from what we originally thought we were going to be able to obtain to what we delivered on day one.

Matthew Niknam - Deutsche Bank Securities, Inc.

Okay. And then just on in terms of any sort of unresolved issues to be aware of for 3Q?

Daniel J. McCarthy - President, Chief Executive Officer & Director

From a cutover perspective, we're essentially done. From an integration perspective, there's some lingering small things, but nothing that should (32:52) to creating kind of the noise that we saw when we first cutover. So, we felt pretty good about that. We will continue to do network integration, though, over the next really two years to three years and, during that time period, we'll achieve the additional $250 million of synergies that we have highlighted.

Matthew Niknam - Deutsche Bank Securities, Inc.

Okay. Thank you.

Operator

We will now move on to Greg Williams with Cowen & Co.

Gregory Williams - Cowen & Co. LLC

Great. Thanks for taking my questions. Can you talk about the $48 million in the strategic decision to terminate certain Verizon CTF contracts? Just give examples, I assume, on the business side and help me understand the process of not bringing them into the fold. I mean is it a general type of product or customer here? Thanks.

John M. Jureller - Chief Financial Officer & Executive Vice President

Hey, Greg. It's John. So, within that strategic decision bucket is, we looked at some of the contracts that we had the opportunity to bring across. And when we parse through them, we saw that the cost to support those contracts just made no financial sense, they were effectively break-even in their nature. Some of the other contractual revenue actually related to the network architecture, that Dan described, as improving. And so, yes, there were certain of that revenue that didn't come across, but, at the same time, as we took out more expense because we had reoriented our network architecture. So, by making that decision, we actually drove a better EBITDA outcome. There were a couple of things like that where we just sort of sat back and made some discrete decisions and did what we thought was best for the business. But, net-net, is that strategic decision bucket resulted in an improvement in EBITDA for us on a go-forward basis.

Gregory Williams - Cowen & Co. LLC

Great. Thanks for the color.

Operator

We will now go to David Barden with Bank of America.

David William Barden - Bank of America Merrill Lynch

Hey, guys. Thanks for taking the questions. I guess just, John, I wanted to go back to the guidance question. I did the math and I'm actually getting closer to about $1.67 billion in EBITDA implied guidance for the year. And if you kind of do that math, it actually implies kind of in the back part of the year, you'll actually see a step-up in EBITDA from the run rate you guided in 2Q. So, I just wanted to kind of revisit that if I could.

And then the second piece was the delevering side of the story. I think you've talked about as much as a 0.2 deleveraging which would imply free cash flows that are well into the mid-$1 billion range. I was wondering if you could kind of elaborate a little bit what the scenarios are that would get you to that level. Thanks.

John M. Jureller - Chief Financial Officer & Executive Vice President

Hey, Dave. We can certainly work through the implied EBITDA numbers, because we want to make sure that we're looking at like-for-like numbers with respect to other things such as cash dividends and non-cash stock comps that we adjust for. But, again, we're just over the $3.6 billion, perhaps not quite as high as where you are but nevertheless still within the same approximate ZIP code.

With respect to the deleveraging, we do see that our exit rate coming out of this year, in terms of EBITDA, will show improvement. And so that, as we go into 2017, is we're setting ourselves up for a good outcome.

Daniel J. McCarthy - President, Chief Executive Officer & Director

Hey, Dave, this is Dan. I would just add that when you think about what some of the impacts were transitory in Q2, so the suspension of the marking additions, obviously, gives us a little bit of a lift there, not having some of the service level credits for some of the issues we've dealt with at the close. We also, in the fourth quarter, tend to see snow birds come back into the Florida market. And as John pointed out, we do have some expense synergies that we're counting on taking out in the fourth quarter.

David William Barden - Bank of America Merrill Lynch

Got it. And then on the leverage side, John?

John M. Jureller - Chief Financial Officer & Executive Vice President

Well, I'd say, on the leverage side, as we trend into 2017 and get through the year, we're still comfortable with that range of the 0.1 turns per annum to 0.2 turns per annum. And as we communicate more specifically, our 2017 guidance, either at the end of this year or early next is, we can shed some more light on, on what that deleveraging might actually look like.

David William Barden - Bank of America Merrill Lynch

Perfect. Thanks, John.

Operator

And we will now go to Frank Louthan with Raymond James.

Frank Garreth Louthan - Raymond James & Associates, Inc.

Great. Thank you. Also, on the EBITDA, on slide 17, you're discussing trailing 12 months of a little over $4.6 billion, but you're guiding just kind of over $4 billion. It's a pretty large drop even with the synergy upside. If you could walk us through why you're seeing that much of a drop even with the new synergies you found? And then I wanted also go back to slide 10, and in particular with the revenue allocations and the bad debt, I mean, in general you're coming in at a run rate that's substantially below where, I think, the Street was and where we were. And in particular, having asked in the past about revenue allocations and debt reclassification and things, I'm, was kind of surprised to see this come up in the quarter. Could you discuss, at what point you realize that that was going to be an impact and why that wasn't disclosed in some of the prior filings you had before now?

John M. Jureller - Chief Financial Officer & Executive Vice President

Sure, Dave (sic) [Frank]. I'll start off with a couple of things, and then let Dan come back in. Yours was a multi-part, so I'm going to try to remember the different pieces. With respect to the EBITDA guidance going forward, I think – we think about $4 billion as sort of the baseline for where we're going to go. And as we develop that out, we'll see more. We do have certain of the trailing revenues that have rolled off our business both from strategically, from our existing business and from the acquired business, and primarily it's the voice revenue headwinds that we've had. So we always factor this in from a trailing perspective, but we do feel comfortable that we will have a deleveraging path as we go forward.

With respect to your question I think on the allocated revenue or the strategic decisions that we took, these are things – these are information that either we develop right as we were getting into cutover or as we saw as we – the financial impact, as we got throughout the entire quarter. But it's important to remember, though, that what we drove was a positive EBITDA outcome from all of these things, and that does not include the incremental synergies that we think about the business going forward. As well as those incremental synergies, we've only started to bake in to our forward thinking with respect to EBITDA. So, some of this information was developed just immediately prior to close, some throughout the course of the quarter that we could really quantify in a more specific way, but we do feel comfortable in our business as we go forward.

Frank Garreth Louthan - Raymond James & Associates, Inc.

Okay. Thank you.

Operator

We will now go to Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley & Co. LLC

Great. Thank you very much. So on the $250 million, I think, John, maybe you were just talking about that, how should we – you said that's a three year target. So is that sort of ratable over the next three years or will be front-end or back-end loaded, what have you baked into the 2017 number? And then how are you thinking about any special access impact on 2017, and any latest thoughts from your Washington folks about what we should expect from the FCC and impact on Frontier? Thanks.

Daniel J. McCarthy - President, Chief Executive Officer & Director

Hey, Simon, this is Dan. I think that the $250 million – the ultimate $250 million is really over the three years. We do see probably in the order of $30 million to $50 million over the next six months to nine months. And then, a little bit longer timeframe as we take advantage of some of the automation that we've created as part of the integration. We feel very confident in the number, and we'll update on timing and the schedule as we get a little bit more clarity past the end of this year. As far as the special access proceeding, I think it's too early to tell exactly what the impact is going be to us. I do think that the Chairman desires to have something done on his watch, so to speak, and he'll push to do that. The comment period, it was just extended additional two weeks based on the need to maybe modify some parts of the record around Ethernet and some other data. So, I think it's a little too early to tell. We haven't baked any impact in until we get a better feel for if and when there might be some productivity factor changes that get implemented, and we should have a better feel for that as we get into reporting our next quarter.

Simon Flannery - Morgan Stanley & Co. LLC

Great. Thanks very much.

Operator

We will now go to Brett Feldman with Goldman Sachs.

Brett Feldman - Goldman Sachs & Co.

Thanks. Another question on slide 10, just to make sure I understand. The revenue impact you described as temporary, you are showing a $26 million impact in the quarter, but only a $14 million estimated EBITDA impact, I'm wondering why it's not one-for-one, I thought maybe I misheard, I thought that was mostly revenue credits and late fees and other things? And then I have a follow-up question.

John M. Jureller - Chief Financial Officer & Executive Vice President

Sure, Brett. The biggest portion of that was really how we recognize on a deferred basis, customer installation revenue. And actually that customer installation revenue recognition is matched on a dollar-for-dollar basis with a related amount of expense. So, the net change, the net impact to EBITDA is zero. The other items that might fall into that bucket were things, for example, of late fees that we didn't charge during the quarter, we took the decision to be very customer friendly as we did sort of a handover, and then there was a very modest amount of customer credits that we gave. So, both of those latter two buckets is just not something, that is a dollar-for-dollar impact, but it's not something that we see going forward into this quarter or next.

Brett Feldman - Goldman Sachs & Co.

Okay. And then as a follow-up, it sounds like you're going to – your activity levels are likely to increase. So, for example, you expect gross adds or you're seeing gross adds to increase. Is there an area of the P&L where spending is now re-ramping in order to accomplish that, and is that just a flat increase in that line or is there something you're spending money on in the first quarter where you kind of sort of repositioning that budget?

John M. Jureller - Chief Financial Officer & Executive Vice President

Yeah, marketing expense really shows up in SG&A, so we think that there is going to be some more expense associated with there, and then to the extent that we have outside commissions as well that we pay with respect to that activity, but it's mostly an SG&A item.

Brett Feldman - Goldman Sachs & Co.

And...

Daniel J. McCarthy - President, Chief Executive Officer & Director

I'm sorry, Brett. We will see, as I mentioned before, reduction in some of our network costs as we go through the second half of the year.

Brett Feldman - Goldman Sachs & Co.

Great. And then, maybe just one last one, so I sort of understand this in terms of the cost structure is generally being lower than I think we would have thought. I imagine there are some costs that are just flat transfer, you had employees, they are making certain amount of money, they had benefits, it was all quite known. To what extent did cost come over and they were just lower than you maybe thought you needed to assume. And maybe to what extent do you think you were going to have to create a cost structure and it ended up being more favorable. I think the example you gave on the cost of the data network may have fallen into that category.

Daniel J. McCarthy - President, Chief Executive Officer & Director

Yeah. I think you're right, there was a certain amount of direct costs that were attributable to the employees, their benefit packages, all of the direct costs are associated with their activity in the market. That came over probably slightly lower than what we had originally thought based on some retirements that happened and a little bit lower head count that transferred. I think the bigger issue for us was that we had good insight into the Verizon allocations, but not perfect insight. So, we were conservative in assuming that there were costs that we were going to have to replace.

As we've begun to operate these markets, though, what we've come to learn is that our cost structure that we had put in really is what we showed you today. And even though we'll have a little bit higher spend as we go forward on marketing or maybe success stage driven on commissions to alternate channels, that's really can be offset hopefully through additional cost synergies around the completion of our network cutover, which will happen in the back half of the year.

Brett Feldman - Goldman Sachs & Co.

Okay. Great. Thank you for taking the questions.

Daniel J. McCarthy - President, Chief Executive Officer & Director

And, operator, I think we have time for one more question.

Operator

Okay. We'll take our last question from Phil Cusick with JPMorgan.

Philip A. Cusick - JPMorgan Securities LLC

Hey, guys. Thanks. Just so I understand, the strategic decision savings that you talked about on EBITDA are – on the additional synergies, did that include the $48 million in revenue you gave up plus the additional $10 million on EBITDA? I'm just trying to figure that out. And then second, are we now through the wireless backhaul headwind? Thanks.

John M. Jureller - Chief Financial Officer & Executive Vice President

Yeah, Phil, those strategic decisions, if you will, that comprises that $48 million revenue bucket. And, again, setting that aside, it actually gave us $10 million of EBITDA. So that's (47:13).

Philip A. Cusick - JPMorgan Securities LLC

Just trying to – did you count the $10 million or the $58 million towards the synergy bucket?

John M. Jureller - Chief Financial Officer & Executive Vice President

In the synergy bucket, that would be a number of different things.

Daniel J. McCarthy - President, Chief Executive Officer & Director

Yeah. There were a number of synergy accelerations, Phil, around a single contract that was associated with the architecture I described. So, by changing that out, and it was a very aggressive plan that required a fair amount of CapEx and coordination to do it, we forgo about $11 million of revenue, but we achieved a much higher improvement in EBITDA with a significant reduction in cost, and that reduction in cost was in the synergy that was attained.

Philip A. Cusick - JPMorgan Securities LLC

Got it.

John M. Jureller - Chief Financial Officer & Executive Vice President

And then...

Philip A. Cusick - JPMorgan Securities LLC

And then second, are we through the wireless backhaul headwind at this point?

John M. Jureller - Chief Financial Officer & Executive Vice President

Phil, I think we are going to continue to see it really around our legacy footprint, probably about $3 million or so a quarter. We don't think we have that sort of headwind in the new markets, and so it's mainly in our existing footprint.

Daniel J. McCarthy - President, Chief Executive Officer & Director

Only caveat I would say on that, Phil, is that we still probably will have the impact of at least one of the carriers who are still executing on their tower strategy, that's going to take a little bit longer than probably they had originally thought. So the offset is, we may have some additional TM revenue for a period of time, but the headwinds could extend over several more quarters.

Philip A. Cusick - JPMorgan Securities LLC

Great. If I can one more, if you could dig into video trends a little bit, should we expect that legacy video customers were negative as well as CTF? And do you think we can expect video customers to return to growth in the next year? Thanks.

John M. Jureller - Chief Financial Officer & Executive Vice President

We had a slight decrease in video customers in our legacy footprint in this quarter. But the plans that we're driving as we go forward as we open up new markets, and we will probably open up three to five new markets during the course of this year, which should pass an incremental, approximately 500,000 households by the end of 2016, as well as continuing to rollout upgrades to both our FIOS product and to our Vantage TV product will be well-received, and it will help drive good performance in the back half of this year.

Daniel J. McCarthy - President, Chief Executive Officer & Director

The only thing I'd add to that, Phil, is, as we've talked before, we aggressively managed getting our customers to the right price points in the market. As we went through that, we absolutely saw what we anticipated, which was the ARPC lift that John described earlier. We also saw a slight uptick in churn, but that's not really something we expect to continue going forward. So, we feel very good about the strategy, how we move the customers to the right revenue, and we do think that, as we go forward, we should get to positive growth on the video subs.

Philip A. Cusick - JPMorgan Securities LLC

Understood. Thanks, guys.

Daniel J. McCarthy - President, Chief Executive Officer & Director

So, in closing, we had very solid results and execution in the first quarter of ownership of assets that doubled our size. I am proud of the accomplishments of our teams and very pleased that we entered the second half on firm footing to begin executing against our opportunities and goals as a combined entity. We remain committed to our disciplined capital allocation strategy and our attractive sustainable dividend that is supported by a sector-leading payout ratio.

Thank you all for participating in our call, and we look forward to delivering for our customers, shareholders, employees, and all other stakeholders in the future.

Operator

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

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