Frontier Communications' CEO Discusses Q1 2012 Results - Earnings Call Transcript

May. 7.12 | About: Frontier Communications (FTR)

Frontier Communications (NYSE:FTR)

Q1 2012 Earnings Call

May 07, 2012 9:00 am ET

Executives

Gregory Lundberg -

Mary Agnes Wilderotter - Chairman and Chief Executive Officer

Daniel J. McCarthy - President, Chief Operating Officer and Chief Operating Officer - Electric Lightwave

Donald R. Shassian - Chief Financial Officer and Executive Vice President

Analysts

Batya Levi - UBS Investment Bank, Research Division

Simon Flannery - Morgan Stanley, Research Division

Michael McCormack - Nomura Securities Co. Ltd., Research Division

Scott Goldman - Goldman Sachs Group Inc., Research Division

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Thomas O. Seitz - Jefferies & Company, Inc., Research Division

Michael Rollins - Citigroup Inc, Research Division

David W. Barden - BofA Merrill Lynch, Research Division

Peter Rhamey - BMO Capital Markets U.S.

Christopher M. Larsen - Piper Jaffray Companies, Research Division

Operator

Good day, everyone, and welcome to this Frontier Communications First Quarter 2012 Earnings Results Conference Call. This call is being recorded. At this time, I'd like to turn the call over to Mr. Gregory Lundberg. Please go ahead, sir.

Gregory Lundberg

Thank you, Jay. Good morning, everyone. The purpose of this call is to discuss the 2012 First Quarter Results for Frontier Communications. The press release and earnings presentation are available in the Investor Relations section of our website, frontier.com. On today's call are Maggie Wilderotter, Chairman and Chief Executive Officer; Dan McCarthy, President and Chief Operating Officer; and Donald Shassian, Chief Financial Officer.

During this call, we'll be making certain forward-looking statements. Please review the Safe Harbor language found in our press release and SEC filings. On this call, we'll also be discussing GAAP and non-GAAP financial measures as defined under SEC rules. Please refer to the reconciliation between GAAP and non-GAAP provided in our earnings release.

I'll now turn the call over to Maggie.

Mary Agnes Wilderotter

Thanks, Greg, and good morning, everyone. For today's call, it would be hopeful for you to follow along with the supplemental slides available on the Investor Relations page of our website at www.frontier.com.

I'll begin today with a summary of the quarter and then hand the call over to Frontier's President and Chief Operating Officer, Dan McCarthy, who will give you an update on our competitive engagement, marketing and field activities. Then, our Chief Financial Officer, Don Shassian, will provide the financial overview for the quarter.

To begin, please turn to Slide 5. Financially, first quarter 2012 results were solid. Operating metrics improved across-the-board, cash flow performance improved, we stabilized financial leverage and we continued to invest in increasing network speed, while expanding broadband to 40,000 new homes.

We kept the results steady, even with over 2.5 million customers being converted to new systems and with no major marketing activity for 2 months of the quarter. I cannot overstate the importance of the Frontier successful completion of the final 9-state systems conversion in March.

After a long road, Frontier systems integration of the Verizon acquisition is completed, and we are opening the door to a new way of doing business across all of our markets, the Frontier way. We are now in complete control of our systems, processes, products, marketing and the delivery of a better customer experience. Our efforts will now be focused on 3 things: One, revenue growth; two, broadband leadership; and three, operational excellence.

Please see Slide 6. On the revenue growth front, we will be introducing simplified bundles, new voice and broadband products and cloud hosting services for commercial customers.

Broadband leadership is all about access, speed and capacity, as well as an improved customer experience. We will extend our reach, drive market share and enhance our current online and off-line customer interfaces. It will be all about choice, reliability and local service that will set us apart from the competitors in our markets. In addition, we will continue to upgrade our network technology to provide the best broadband experience for our customers.

Finally, we will drive for operational excellence, eliminating old rate plans, simplifying our business practices and automating manual activities. Prior to the Verizon acquisition, we delivered EBITDA margins north of 50% for 6 years. Each quarter, we are improving margins and are inching toward that 50% mark. We believe we will be able to achieve our legacy margin levels within the next 2 years.

Revenue, broadband and operational improvement will all lead to increased shareholder value. We expect higher levels of free cash flow, lower leverage and a sustainable dividend payout ratio. I want to mention that our first quarter dividend of $0.10 per share will be declared and approved by our Board of Directors at our board meeting tomorrow.

To accelerate change, I reorganized the company in April to have all customer facing activities report into one person, Dan McCarthy, who is promoted to President of Frontier. You will hear from Dan in a moment, but the board and I are confident in his leadership as we enter this dynamic new phase of Frontier's business.

In summary, the first quarter delivered on our financial commitments and demonstrated continued progress on keeping customers, enhancing broadband and improving our operational metric.

Slide 7 shows the financial highlights of the first quarter. Total access line losses reached 7.9%, the lowest level since closing. Don will take you deeper into the numbers, but we're very pleased to see this progress, and it's being led by expanding broadband and video subscribers, both of which were solid this quarter.

On the revenue side, residential ARPU and commercial ARPU both expanded. Business ARPU was helped by key products, like Ethernet, dedicated Internet access, wireless backhaul and CPE. These 4 categories are 50% of total business revenues and grew 6.4% on an annualized basis in the first quarter. With excellent cost control and $13 million of incremental synergies, Frontier grew EBITDA nearly 1% sequentially and expanded our margin to 49%.

Despite increased capital expenditures for speed and expansion during this unusually warm first quarter, we generated $253 million of free cash flow, which puts us right on pace for meeting our 2012 guidance of $900 million to $1 billion.

I'd like to now hand the call over to Dan McCarthy for a business update and a review of some of the successful trends out of our recently converted markets.

Daniel J. McCarthy

Thanks, Maggie. Turning to Slide 8. The organizational change Maggie mentioned is important for Frontier because it centralizes all employees that directly impact our business and residential customers. These include network design and engineering, who are the architects of our broadband and communication services; field operations, who build and service the network; marketing, commercial sales and call centers, who market our services and serve our customers; and retail presidents, who lead our local engagement strategy and who can now push full P&L responsibility down to the local level.

Last week, we announced that Bob Johnson has joined Frontier as the area President of the Midwest. He will oversee all of Frontier's call center activity. Bob was the President of consumer at Sprint Nextel and spent over 15 years at AT&T Wireless. His experience is in areas that are critical to Frontier, and we welcome him aboard.

Each of these areas creates a constant flow of intelligence that we can use across our platform to better serve and respond to customer needs. This new structure will allow for decisions to be made faster and have greater impact and will be able to change course more quickly when things aren't working.

This new structure also gives me full accountability to deliver on 4 key operational imperatives that drive shareholder value. One, continue to enhance the network. Two, continue to improve service. Three, continue to reduce churn. And four, increasing sales.

For business customers, we continue to ramp up new products and our sales focus. We completed a national sales meeting in March with over 400 small, medium and enterprise sales people. They are mandated to think big, and we're giving them increased network bandwidth and more flexible products to serve the needs of businesses in our communities.

Demand for high bandwidth drove a 6% year-over-year increase in Ethernet revenues in the first quarter. Demand for high-capacity data connection to wireless towers drove 16% year-over-year growth in backhaul revenues in the first quarter. These are 2 of the categories and the key products that Maggie mentioned. Results in other parts of commercial also continue to improve through our focus on value-added services and higher speeds. You will also see Frontier enhancing business offerings through additional strategic partnerships.

In residential, we saw financial improvements for network enhancement, improvements in call center interactions and ongoing local engagement. In addition to services on the core Frontier network, we are focused on growing incremental revenue from these sources like Frontier security suite, WiFi networks for cellular traffic offload, home automation and additional mobility services.

We are repositioning our brand in the marketplace. We will lead with broadband, surround this broadband with value-added services and give the customer, whether residential or business, a differentiated service with more choices to build a custom, ala carte solution. But whatever the choice, it will backed up by reliable, local support.

Turning to Slide 9. You can see the benefits from converting the acquired properties on to Frontier's own systems. We've updated you in prior quarters on West Virginia, which was converted on July 1, 2010. You can see the continued progress in West Virginia, where a significant broadband expansion has enabled line losses to improve from 11.2% to 5.6%, which is better than legacy overall.

West Virginia churn also continues to step down. What we call Frontier 4, North and South Carolina, Indiana and Michigan, converted on October 1, 2011, and have already shown a reduction in line loss rates from 11.9% at 2Q '10 to 9.7% at 3Q '10 to 9.2% in first quarter of '12. Frontier 4 churn has also come down from 2.23% to 1.94% over the same period. These positive changes are driven by both broadband expansion, which you can see in the slide and from systems conversion and local engagement. Having 100% of the systems running these states on the legacy Frontier platform means we can now manage, serve and sell the same way we always have done. And being on the same playbook company-wide is a critical step forward for the company operationally and financially.

I'll now hand the call over to Don Shassian, Frontier's Chief Financial Officer.

Donald R. Shassian

Thank you, Dan, and thanks, everyone, for joining our call today. Please turn to Slide 10 to start with our top line revenue drivers. Overall, you can see that we have a directionally good quarter in these key metrics. Broadband net subscriber additions of 11,700 were up 25% from the prior quarter. Video net adds also expanded, led by DISH and a lower level of FiOS video disconnects. Total access line losses of 7.9% was a strong improvement. The acquired property continues to improve every quarter. As a reminder, the acquired properties line loss rate at closing was 11.4% and is now 9% for Q1. I believe that we are on track to drive that loss rate down to 8% as we exit 2012.

A big driver of this was in the acquired residential side, where we've now taken over 3 percentage points off the loss rate. It's also worth noting that legacy line loss was 5.8%, our lowest in over 3 years. Residential monthly churn in the acquired properties was up slightly as a result of the conversion, so we expect it to continue to decline.

Slide 11 shows our revenue composition. Total revenues saw $15 million sequentially or a 5.8% decline from Q1 in 2011. This is a slightly higher loss rate than last quarter, and most of the pressure came from carrier disputes from ocean and other customer credits and onetime revenue declines arising from a recent billing conversion, offset by favorable cash collections and the other revenue line item. Regulatory revenue remained essentially flat as higher USF charges were partially offset by lower switch minutes.

Segmenting our customer revenue into its 2 components, residential and business, you can see that residential revenue fell just $9 million sequentially, a 44% improvement from last quarter and its lowest quarterly decline since the acquisition. Business revenue was down $7 million or 1.2% sequentially, due to higher carrier disputes and $2 million less in CPE revenue. As you heard Maggie and Dan discuss, business remains a big focus for us and represents 52% of our customer revenues. We plan to grow this and together with broadband revenues, plan to expand beyond the 65% of total customer revenue that business in broadband represent today.

Slide 12 gives some more color on our residential and business revenues. Residential ARPU grew sequentially due to improved aging and collections and is beginning to show the impact of additional more valuable services led by broadband. This better ARPU and improved customer metrics drove the residential revenue loss rate to only 1.7% in the quarter. Business ARPU continued to grow sequentially, helped by growth in wholesale and carrier customers and offset by a decline in small business customers who generally have an ARPU under $200 per month.

Our cash operating expenses shown on Slide 13 declined $19 million sequentially, driven primarily by $13 million in cost synergies related to the systems conversion. I'd like to note that our cash pension and OPEB cost in the first quarter was quite low, $3.4 million, as no pension contributions were required in Q1. The timing of our contributions into the pension plan over the remainder of the year will increase our cash pension OPEB cost. While this will put pressure on our adjusted EBITDA margin, we expect additional cost savings and better revenues to offset that pressure.

Our synergy update is on Slide 14. We recognized $13 million in the quarter from vendors saving, contractor reductions, network cost savings, benefit changes and real estate savings. Our total synergy run rate is now $604 million, which is tracking well toward our 2012 goal of $650 million.

On Slide 15, you can see that we increased capital expenditures in the first quarter to take advantage of the unusually mild weather. We expect slightly reduced quarterly spending over the next 3 quarters, as we are on target to hit our CapEx guidance. Capital investments in the first quarter included 40,000 new broadband expansion homes, investments in strategic initiatives and continued network enhancements.

As of March 31, 2012, 84% of the households in our markets were able to get broadband from Frontier. Further, 76% of the homes in our footprint received 3 megabits or greater, 56%, 6 megabytes or greater and 28%, 20 megabytes or greater. Our focus is on increasing the speed further.

Slide 16 shows that our trailing 4 quarter free cash flow exceeded our current annualized dividend payment by over $700 million, and our Q1 payout ratio was 39%. As you can see on Slide 17, we did have a very slight improvement to our leverage ratio due to increased cash and higher adjusted EBITDA.

Our cash balances at Q1 were up $40 million compared to year end. Our accounts receivable was down on improved collections. And our accounts payable was also down as we have caught up in paying for all of our conversion and broadband initiatives at year end.

There were a lot of questions raised last quarter relative to our elevated level of accounts receivable. Please note that whenever we have done conversion, the delayed billing that occurs drives a temporary elevation in receivables until the cash is collected. If you look back over the past several years, our days sales outstanding has ranged from 33 to 37 days. And at the high-end of that range during quarters subsequent to conversions, including our Commonwealth conversion in September of '07 and our Rochester conversion in September of '08.

At year end, our receivables were elevated as a result of our October 2011 conversion. In Q1, as anticipated, higher collections occurred, driving the receivable balance down. In addition, certain carrier volume discounts previously reflected in other liability to December 31, '11 have been reclassified to accounts receivable for both periods presented.

As a result, on an adjusted basis, our day sales outstanding decreased from 41 days in Q4 '11 to 37 days in Q1 2012. Net-net, I feel very comfortable with our accounts receivable as we processed through the aftereffects of this last conversion.

With cash on hand and our undrawn $750 million revolving credit facility, our liquidity is a strong $1.3 billion. As we discussed with you on our last call, we plan to use internally generated funds to meet our $581 million maturity in January 2013, which you can see on Slide 18. We expect to file a new shelf registration statement in the near future to replace the shelf that expired in April 2012 and will continue to opportunistically refinance the other maturities over time.

Our 2012 guidance remains unchanged, as shown on Slide 19. Our first quarter free cash flow puts us on track to reach $900 million to $1 billion of free cash flow for the year. I'll remind you that capital expenditures were seasonally high in the first quarter, and we remain comfortable at this point with our range of $725 million to $775 million for all of 2012.

Please note that our guidance does not include the recently announced Connect America Fund Phase 1 amount available to Frontier of $72 million. We are still analyzing the proposed funding relative to our capital expenditure plans. We anticipate that any amount taken by Frontier would be treated as a capital expenditure offset and would not be accounted for as revenues.

In summary, Frontier delivered a good quarter on the key metrics. Stability and revenue declined and executed on our synergy targets. I expect that the strategic and organizational changes that Maggie and Dan talked about will improve all of these metrics, and I look forward to reviewing the results with you in the second half of the year.

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

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Batya Levi with UBS.

Batya Levi - UBS Investment Bank, Research Division

I'd like to ask a question about revenue trends. You started to see some nice momentum in revenues, especially in the consumer market and with no real marketing in the quarter. Can you provide some color on how we should think about revenue trends, how they tracked in April, maybe for both consumer and business segments? And also, how we should think about that continuing on into the second half; do you expect rate of decline to continue to improve from here on?

Donald R. Shassian

Well, Batya, I'll start. We do have a little bit of cleanup coming from those conversions. I think a lot of the initiatives that we're looking to be kicking in place right now that Dan and Maggie talked about. As we start to really get all of our call center personnel working on all cylinders as we start to really be more effective with our marketing, we are expecting to see improvements. I think it will be more in the back half of the year, the second half. I think third quarter might be a little bit lumpy. But we are continuing to see improvements, and I expect churns to continue to improve and then the gross adds really to start take hold.

Mary Agnes Wilderotter

Yes. Batya, the only thing I would add is, I really think the acceleration, as we talked about, will be in Q3 and Q4. Q2, we will continue to finish the cleanup from this first quarter conversion. And we do see stability continuing in the second quarter. So we don't foresee any fallbacks on revenue. But when we look at the acceleration, we're really focused on really being aggressive in the marketplace in the third and fourth quarter of this year.

Batya Levi - UBS Investment Bank, Research Division

And the lumpiness in the third quarter, is that more related to the regulatory revenues?

Donald R. Shassian

I didn't mean lumpiness in the third quarter. It was more second quarter as we work through the systems conversions. We've got a number of products coming over. We're looking at different price points with those products coming over, trying to push customers on to a number of our digital phone products and pushing it to unlimited LD and really realigning people's data plans for what really is needed for them. I think we're going to deal with that in the second quarter.

Mary Agnes Wilderotter

Yes. I think Don meant the second quarter, Batya, and not the third quarter.

Operator

It looks like we'll move to our next question from Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley, Research Division

Don, are you going to talk a little bit more about CapEx? I think at one point you mentioned the weather as being a driver of Q1. Last quarter, you were very light. So can you just talk about the sizing through the rest of the year? Is it going to be fairly level or will we also see a drop off in Q4? Perhaps you could just help us think about your view into '13 now. You've talked about it coming down, does it come down sort of midway through '13, the end of '13? And tie that into where we are on the broadband rollout.

Donald R. Shassian

I'll start on CapEx, Simon. We've got a lot of properties that are in cold-weather portions of the country. And the weather, as you know, in the first quarter, was unusually warm. And so a lot of activities that we would have been kicking off in second and third quarter, we accelerated. We just really kept pushing to try to get the broadband build, expansion done, continue to improve speeds. And I think it'll be a little bit lower in second to third quarter. I don't think it's going to drop off like we did last year in fourth quarter, I think it's going to be more on a level, but a little bit less than we were in the first quarter. 2013, we're still evaluating our plans in terms of what our expansion plans will be, our speed plans are. I think if there's going to be any decline, it will be more at the back end of the year, not the front end of the year.

Simon Flannery - Morgan Stanley, Research Division

Okay. And where are you in terms of number of homes passed with broadband now versus your targets?

Daniel J. McCarthy

Simon, this is Dan. Our target was really -- we're at 77% today. We're very comfortable that we'll be able to hit our FCC requirements on that target.

Mary Agnes Wilderotter

Yes. We're somewhere around between 500,000 and 600,000 customers that we've built out, Simon. So you'll see us again in the next several quarters get very aggressive on penetration. I know in the slides, we show some of the penetration levels that we've had in West Virginia, which are outstanding. I think it's 23% conversion just in the buildout areas. So you'll start to see that in all of the new markets.

Operator

And now we'll take a question from Mike McCormack, Nomura Securities.

Michael McCormack - Nomura Securities Co. Ltd., Research Division

Don, maybe you can just make a quick comment, I'm thinking about the maturities. I guess you've already addressed the 2013, but the '14 and '15. Just your thoughts on sort of timing on a refi. It seems like the debt markets are pretty open right now. Or if you think the revolver is something that you might think about using. And then, secondly, can you just sort of give us some clues as to margin profile in business versus res?

Donald R. Shassian

Mike, on the maturities, we're going to be opportunistic. Debt markets are -- look pretty good. We wish that our spreads were a little bit better. We'll just continue to be opportunistic. As I mentioned, we're going to file a shelf registration, put ourselves in a position to do something whenever we'd like. And we'll be careful in terms of where we're going to go. I don't feel the need to go real hard and do something right now. The spreads on what we -- we've taken debt out and have to refinance is not necessarily favorable. But I also understand that it's beneficial to sort of take some of those towers out earlier than later. So we're just going to be optimistic. I do not expect us to use the revolver to take down any of those towers. Margin profile, business customers are quite profitable. You've got small and medium, has a very high profitability, it looks an awful lot like res. Enterprise customers, depending on the dedication of personnel that you're giving and the competitive nature of the bidding process, could be a little bit less. But commercial is extremely profitable and it's certainly an area of great growth for us.

Operator

And next question will come from Scott Goldman with Goldman Sachs.

Scott Goldman - Goldman Sachs Group Inc., Research Division

Two questions. One, I just wonder if you could talk maybe about on the synergy side, Don, how that layers in as we go throughout the year. You did all the final conversions in March, which leads into April. But maybe talk a little bit about what the implications are for synergies in 2Q and how much of that $94 million licensing fee to Verizon has already been realized versus yet to be captured. And then, secondly, I appreciate all the comments you gave around the working capital, the accounts receivable and DSO and so forth. Just wonder if you can give us a bigger picture to look in terms of what are the working capital needs of this business year in and year out.

Donald R. Shassian

Scott, on the synergy side, the payment to Verizon was essential in an annualized basis about $16 million more to be realized, which we'll accomplish in second quarter. Since conversion, we have been realigning our IT organization to have the right number of resources, the internal versus contractor, and also changing some skill sets out. There continues to be real estate savings, a number of network initiatives to continue to reduce some cost. So I think there'll be a little bit of cost savings improvement in the second quarter, but I expect a little bit more in third and fourth quarter, as a number of other initiatives really start to kick in. We feel very comfortable with $650 million. And obviously, as you know, we have an internal target set by Maggie that's a lot higher than that. Working capital needs, we essentially -- we pay payroll and we've got outside vendor cost, whether it's contractors or software maintenance, network maintenance activities. And the true event, that's it. It's pretty steady. It's pretty predictable. And it was elevated at the end of the year, both on receivables and payables, and we have gotten that all cleaned up as we've gone through our general ledger conversions, the October conversion on billing systems and operating systems and obviously through this very, very large one we just did in March. So we feel very good about the progress going forward. Cash will continue to build. This is generating a lot of cash above our dividend. And that cash will be used to pay down the debt, and it will be used up continue to pay down debt in the future. Does that help, Scott?

Scott Goldman - Goldman Sachs Group Inc., Research Division

Don, I just wonder if I can just follow-up, I mean if I sort of look back historically, and some of this is obviously preacquisition. But I mean, it looks like some years were sort of a modest use of cash and working capital, other years may have been a modest source of cash. Just wondering if there's any color you can give in terms of what your expectations would be in a steady-state environment for working capital.

Donald R. Shassian

Operating activities generate cash, it's a source of cash. It is in excess of the capital expenditures. So it's a very good positive cash flow business. Continue to push on the revenue side, continue to get expenses out and continue to manage our CapEx appropriately. It's a source of cash and will continue to be so.

Operator

The next question will come from Frank Louthan with Raymond James.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Can you give us some more color on broadband leadership? How do you expect to -- what exactly does that mean, is that leadership on speed? And how much is pricing going to play in? At what point do you expect to be more aggressive on pricing to capture some market share?

Daniel J. McCarthy

Frank, this is Dan. As far as broadband leadership, we've been working pretty steadily to improve the core network around the country. Now that we're on a single platform around the country, we can now move forward in adding different capabilities, both for the residential and the commercial base. So you'll see us aggressively move forward with sort of VDSL and bonded ADSL2 copper. And when you look at adding both of those 2 to the portfolio, you really change the game as far as the speed and capacity that can be offered, both from the commercial base and the resi base. So we'll be aggressively moving forward with that. And we'll also be introducing products around different segments, including simply broadband, which is our stand-alone products. And it's really tailored to people who are just looking for kind of a stand-alone, high-speed service. We'll be aggressive appropriately on different segments and we'll look to take market share on the commercial side, as well as different segments we haven't focused on in the past.

Mary Agnes Wilderotter

Frank, this is Maggie. Just to sort of add on, on what Dan has said. We are looking at simplifying the tiering of broadband and also having different tiers based upon different speeds and capacities for our customers. We think there is a big upgrade opportunity in terms of grabbing share, but also moving customers through the profile of different activities that they're using broadband for and getting them on the right plans with Frontier. On the business side, we just introduced a new product called Duet, which is a VoIP phone and broadband product that is at a killer price point in the new markets. We do think it is very competitive, and we're using it to aggressively grab market share on the small business side. We've just launched it in 2 states. We're expanding it to 12 more states over the next couple months. So we also think that leadership from a broadband perspective for small business will make a big difference. But the other piece of -- sort of a revenue shift for us will be taking all of the old rate plans, especially in the Verizon-acquired markets, and moving customers off of those old plans on to our current Frontier plan. And we do think that there is a pretty substantial revenue upside. This will take us several quarters to go through that rationalization and migration plan. But we think the net-net is we'll get customers on the right portfolio of products that will also be revenue enhancing for the company, and we're going to surround the products with the right kind of service experience, both online and off-line. We're redesigning all of our online product sets for a better customer experience so they can manage their own broadband usage and actually upgrading or changing what they do with broadband themselves, if in fact, they want to do that. We'll always have local and customer service available, but we want to be more flexible for the customer as well.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Okay. That's very helpful. Can you give me an idea of -- I appreciate the statistics on the amount of homes passed and broadband availability. What percentage of your broadband availability will you be able to push VDSL or bonded copper to? And then one quick question for Don. What's sort of the time frame to getting to the 2.5x leverage?

Donald R. Shassian

Well, Frank, every DSLAM that's been deployed for the acquired properties is capable for both VDSL and ADSL bonding. In addition, all of the DSLAMs that we have been deploying in legacy for the last 4 to 5 years are in that category as well. So we're working to build those plans, to move those products into the network as quickly as possible. And we'll be making those progress as we go through the year.

Daniel J. McCarthy

On leverage, Frank, you can do the math as well as I can. But our view is it's going to take a couple of years, probably the back end of 2014.

Operator

And now we'll move to a question Tom Seitz with Jefferies.

Thomas O. Seitz - Jefferies & Company, Inc., Research Division

Data and Internet revenues, I think you called out that there was a bit of an impact due to credits and the like given the system billing conversion. Can you help us think about that line item going forward? Is there going to be a bit of a bounce back after the credits, or does this sort of set a new run rate?

Donald R. Shassian

Tom, there's a couple of items that happened in the quarter. We did have some disputes with a number of carriers. There were promotions and credits. And there also was this lost revenue for about 6 days. We made a very conscious effort while we were doing this conversion. And we actually did it with the October conversion last year as well, but it turned out it was not as significant because a lot of other things would have offset it. But as you lined up cycles between the systems that we were converting off of for data onto our systems, we had to align cycles. And to minimize the calls or concerns and frustration or confusion of our customers, we ended up eating those 6 days of revenue to avoid any of the call back. So that will certainly kick back in. We'll get that right back in October and in April and May, and get back going forward. There are some items we've tried to work through on the promotions and customer credits. So I think second quarter will be starting off a little bit higher from where we are, and we got to move it forward. But there's not a huge bounce back. We've now got to go through the initiatives Maggie talked about and Dan, on the new products, the pricing rationalization, the product rationalization, and really start to move that forward.

Mary Agnes Wilderotter

But Tom, I think you should feel comfortable that some of the pressure that you saw in the first quarter was definitely related to the conversion. And we don't foresee that happening in the second quarter. So you will see more stability on the data side and then some net growth.

Operator

And now we'll move to Michael Rollins with Citi.

Michael Rollins - Citigroup Inc, Research Division

I was wondering if you could help size a little bit more, and forgive me if I missed this, the categories within data, the special access piece, the Metro Ethernet piece, and give us a little bit more insight into the hood of what's going on, on the business data side.

Donald R. Shassian

Mike, we really haven't broken that out historically, that high-speed, both residential and commercial. We've got dedicated Internet, Metro E, we've got wireless backhaul within that, which is a sizable revenue stream as well. Have not broken it out, historically. The items Dan mentioned in his prepared comments, they're really growing quite nicely. Our wireless backhaul are quite attractive and about 16% growth year-over-year.

Michael Rollins - Citigroup Inc, Research Division

And that's really why I'm asking partly because you've broken out some of these growth rates, and I'm kind of curious how we can take that growth and think about how significant of a dollar contributor that can be to the business going forward.

Donald R. Shassian

Very significant. I've got to be careful how much we're going lead with our competitors. But the products that are showing the growth avenue is about 50%, I believe, of our business revenue that are growing quite nicely, and that really gives us a nice lift.

Mary Agnes Wilderotter

Yes, Mike, the other thing to think about on the business side is, we have put a national sales force in place on CPE that are dedicated to selling those products and services, and we have expanded the product lines along CPE. I think, as you know, backhaul is a very strong product set for us, and we've got thousands of towers that we're running fiber to. And when we ran that fiber to those towers, it also opens up huge opportunities for businesses along that fiber route for us to sell the Metro E services into those area that we wouldn't have anticipated doing otherwise. And then the third leg of the stool, as Dan mentioned with bonding and VDSL, as we continue to turn on more and more of these DSLAMs on the network work element, it provides us with greater opportunity, again, to sell through to customers that we couldn't do before. So we think there's a huge amount of potential in these areas. We know it's a competitive area, the largest competitive area of our business. So we're not alone in doing this. But we think we have a great advantage based upon what we're doing with the networks and the products and services we're offering on the network.

Michael Rollins - Citigroup Inc, Research Division

And within that context, just one other follow-up, if I could. A number of your peers actually disclosed the number of towers that are in your footprint, what's upgraded to the fiber already and what's to come as another way of trying to size the revenue opportunity. Is that something that you guys could share with us?

Donald R. Shassian

I don't have it with me right now, Mike, the number of towers we've upgraded, and how many we've upgraded this year. Dan's got it.

Daniel J. McCarthy

Actually, I have -- the towers that we upgraded in 2011 were about 700. We have 244 more to build really through the June time frame. Then we're looking at a number of others with our partners in the wireless business through the remainder of the year.

Michael Rollins - Citigroup Inc, Research Division

And how many are total in your footprint?

Daniel J. McCarthy

It's difficult to size, Mike, but I would say these were some of the most attractive from our perspective and met our return requirements.

Operator

Next question will come from David Barden with Bank of America.

David W. Barden - BofA Merrill Lynch, Research Division

I apologize, Don, if you kind of went into this a little bit already, but the other revenue step up in 1Q, I guess there was some improvement in the bad debts. If you could kind of talk a little bit about how we can kind of extrapolate that revenue contributor over the rest of the year. And then, just second, maybe Don or Maggie or Dan. There were reports over the quarter about Frontier talking to AT&T about potentially licensing the U-verse technology to bring in kind of a more capital-efficient video technology into the footprint as opposed to kind of pursuing FiOS. Could you talk a little bit about what your thought process is there and how were you to kind of move along that route, what it means for the CapEx expectations?

Donald R. Shassian

Our first answer, David, on the other revenue. The improvement -- a very good portion of that is due to improved -- that's our aging has improved. Our collections, as I mentioned, in my prepared comments, the aging, after a conversion sort of elevates. So the fuels [ph] elevate and the bubble sort of pushes back because essentially you're billing later, sometimes 4 to 6 weeks later than you normally would go out. But it goes out, and then you've got to collect it. So there's a little bit of a bubble. We followed, every quarter, a very consistent standard process for reserving and if something is over a certain category in terms of days, we reserve it almost 100%. But as that receivable balance is collected, the aging improves, it continues to improve and the aging comes down. So our receivables continue to come down, and that typically is a pickup just going to a standard, normal by wrote[ph] calculation processes on collections of end-user receivables. I think, as you go forward, we look into the next couple quarters, I do think we're going to have a little bit of a delay from a recent conversion. But I expect that our receivables will probably increase a little bit. I'm hoping that by the end of the second quarter, we'll have it back down. But there's a delay in cash coming in after the conversion and then picks up about 6 to 10 weeks later and then sort of getting normal. And I'm hoping we can get that caught up by the end of the quarter. Also in that category, David, is CPE, which was down about $2.5 million sequentially quarter-over-quarter.

Mary Agnes Wilderotter

And a lot of that has to do with timing.

Donald R. Shassian

That's right.

Mary Agnes Wilderotter

We have a very strong pipeline on CPE. It's just a matter of when we get the CPE installed before we actually book it as revenue.

Donald R. Shassian

We had a large closure in the fourth quarter, and a lot of it is just getting teed back up again.

Mary Agnes Wilderotter

So with regard to the U-verse question. Let me start by saying, we are aggressively selling FiOS in the 3 markets we have. We sort of gone to school on the FiOS product. It is a very high cost to operate FiOS video. We have said that in the past, and we continue to look at that as a stumbling block for us deploying any further IPTV on that type of a platform. So because of that, we've been evaluating a lot of other alternatives of which U-verse is one of the alternatives. We have not announced anything in terms of us doing anything different than what we are doing today. But we do like the U-verse product. We think it's a product that can work, not just on fiber, but it also works on copper as well. So it's a lot more forgiving in the market. We're also looking at a couple other IPTV capabilities. And frankly, we're sizing where IPTV, as a facility states carrier would make sense for us. It doesn't make sense in all of our markets. It's only a handful of markets other than where we have FiOS today. So there's more to come on that over time. Video is very important. We think over the top video is probably more important than anything else. So when we have more to talk about that, we will let you know.

Operator

And now moving to Peter Rhamey with BMO Capital Markets.

Peter Rhamey - BMO Capital Markets U.S.

A couple questions, if I may. First on, you mentioned the Frontier 4 and showed some operating metrics, Dan. I was wondering to what extent can we look at that as a proxy for how we see the most -- the latest conversion going on those? Are there things that we should be aware of as the breadth of the conversion that you did that might make the metrics, perhaps, improve at a slower pace than they are for the Frontier 4? And second question is on employees. Employee count remains elevated. You've just converted -- you just finished the conversion. I was wondering when do we expect employee account to begin to track the synergies that you're getting out of integrating the 2 firms?

Daniel J. McCarthy

Peter, on your first question, we really don't see any difference, major difference between the final conversion and 4. In fact, I would say the final conversion went even smoother than the first Frontier 4 conversion. So as the year progresses, you should absolutely expect to see those same kind of improvement, if not the improvements starting to accelerate.

Mary Agnes Wilderotter

Peter, this is Maggie. With regard to the employee count, let me say a couple things. One is, we did hire a bubble workforce for the conversions, and some of that workforce is gone. But some is still in place as we finish the cleanup. So one of the other things that we've been looking at, as an organization, is the outsourcing that we've done as a company, both on the IT side and also in the call centers. And it's actually cheaper for us to convert contractors and outsourcers to employees. While our headcount goes up, our actual expenses go down substantially. So we've had a goal, especially on the call center side, just to kind of give you an example, probably 60% to 70% of all the calls, when we took over these Verizon properties, were handled by outsourcers, not by employees. We think it's a competitive advantage for our employees to take great care of customers and deliver that customer experience. It's also cheaper for us to do that. So as we've converted on to our platform, we've actually taken down the outsource capabilities that we've had, and we've transformed that into employees in our call centers. And our goal is to have 10% to 15% outsource capability for more overflow and really have the 80-20 of our calls being handled in-house. So too on the IT side, we definitely have changed the mix in terms of what we need on IT, work from a business-as-usual development perspective, that's what we need is application developers versus data management, which is what you had to have in the old environment. So again, on the IT side, you're going to see contractor reductions that are very expensive to us being replaced with employees that cost us a lot less.

David W. Barden - BofA Merrill Lynch, Research Division

Just as a follow-on to that. I think there is another number for synergies out there of $750 million. Are there any plans to give us visibility on how you might get there this year in future quarters?

Donald R. Shassian

Peter, we've always had a higher target. Maggie set a higher target for the entire organization. We've always said as we have a better line of sight, and the line of sight means that we've got things being implemented and we know what's going to happen, we'll talk about that. There's nothing to communicate higher than $650 million at this point in time.

Operator

And that last question will come from Chris Larsen with Piper Jaffray.

Christopher M. Larsen - Piper Jaffray Companies, Research Division

Two questions. One, Don, you talked a little bit about that you'd have some more marketing expense in the second quarter and Maggie was just talking about you had some bubble expenses, integration expenses in the first quarter. Can you talk about how those 2 balance out as we think about expense ratios going from 1Q into 2Q? Do the 2 offset each other? And then, secondly, on the CapEx side, as we think a little bit longer picture here. And on broadband, we've talked a lot about this, but I just want to get a sense for how rapidly you feel you need to upgrade the broadband plan from beyond that 3 to 5 megabits to something larger. Maybe you can put that in the context of your competitors that have already upgraded on the cable side to DOCSIS 3.0.

Donald R. Shassian

Chris, on the first question. First of all, integration expense, we do break out separately for all of our stakeholders in our external reporting. That with the vast majority of what's left on the forecast we have for that should be coming in second quarter. And that should be really dwindling down and going away by the end of the year. I would not -- I sort of don't look at those as offsetting relative to anything else we're doing. We've got marketing expenses. I think we'll be a little bit more efficient in terms of how we're spending. We're looking at a bunch of different areas. I don't expect marketing expense -- if it's going to be higher, it's going to be noticeable for you to be able to see. I think it's working within a budget, and we'll do some different avenues. But I don't think it will be that noticeable for any of our stakeholders to see from a dollar amount.

Daniel J. McCarthy

As far as the broadband question, what we're looking at is really putting the new electronics into trusted markets over the next 12 to 24 months. We've spent a lot of time over the last 2, 3 years really upgrading the core. So the CapEx associated with that is in our past. As we look forward, the success-based capital associated with any incremental sales is really in our normal run rate. And we didn't feel that the upgrades of the electronics for both the VDSL and the bonded copper and also providing Ethernet modes is really funded through our normal BAU [ph] process as well.

Mary Agnes Wilderotter

Yes. Chris, this is Maggie. The only thing that I would add to what Dan said is, we are constantly looking at our market from a competitive perspective. The priority market, where we've actually increased speeds to 12 and 20 meg, have been in the markets where cable has launched DOCSIS or competitive technologies in those speeds and capacity areas. So we feel we are competitive where we need to be. The point is, is we're trying to plan for the next several years, as we continue to see the growth rates on broadband to make sure we get where we need to be. Again, we're also investing with fiber to the towers. That makes a huge difference for us. So hopefully, that helps give you some color on that.

So thanks, everybody, for joining us. As we've talked about this morning, we're very pleased with first quarter, and we are thrilled to be turning the page from acquisition integration and conversion on to business as usual and really driving this business over the next several quarters. Thanks again for your support. We'll talk to you next quarter.

Operator

And with that, ladies and gentlemen, that will conclude your conference for today. Thank you for your participation.

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