Frontier Communications' CEO Discusses Q3 2013 Results - Earnings Call Transcript

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Frontier Communications Corporation (NYSE:FTR) Q3 2013 Earnings Conference Call November 5, 2013 4:30 PM ET

Executives

Luke Szymczak – Vice President-Investor Relations

Maggie Wilderotter – Chairman and Chief Executive Officer

Daniel McCarthy – President and Chief Operating Officer

John M. Jureller – Executive Vice President and Chief Financial Officer

Analysts

Batya Levi – UBS Securities LLC

Frank G. Louthan – Raymond James & Associates, Inc.

David W. Barden – Bank of America Merrill Lynch

Simon Flannery – Morgan Stanley & Co. LLC

Michael I. Rollins – Citigroup Global Markets Inc.

Scott Goldman – Goldman Sachs & Co.

Jonathan G. Epstein – Deutsche Bank Securities, Inc.

Operator

Good day, everyone, and welcome to the Frontier Communications Third Quarter 2013 Earnings Results Conference Call. This call is being recorded.

At this time, I would like to turn the conference over to Mr. Luke Szymczak. Please go ahead, sir.

Luke Szymczak

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

The press release, earnings presentation and supplemental financials are available in the Investor Relations section of our website, frontier.com. During this call, we will be making certain forward-looking statements. Please review the Safe Harbor language found in our press release and SEC filings.

On this call, we will also be discussing GAAP and non-GAAP financial measures as defined under SEC rules. Reconciliation between GAAP and non-GAAP is provided in our earnings release. Please refer to this material during our discussion.

I will now turn the call over to Maggie.

Maggie Wilderotter

Well, good afternoon, everyone, and thank you for joining Frontier’s third quarter 2013 earnings call. It’s great to report another quarter of solid progress as illustrated on Slide 5. We have continued to close the customer revenue decline gap in Q3 with residential revenue slightly up over Q2 and business revenue improvement in the carrier segment, excluding wireless backhaul and improvement in the small, medium and enterprise segment.

Overall, customer revenue was down less than $2 million in Q3, compared to Q2, and is one of the strongest quarter-over-quarter performances since 2010. It reflects our continued focus on keeping customers growing broadband market share across the board, increasing our penetration of add-on products like Frontier Secure and an improved customer experience. Our Q4 operating plan is leveraging this momentum.

This quarter, we achieved stability in small business revenues for the first time since 2010. Carrier excluding wireless backhaul and small, medium and enterprise, improved over second quarter results. The one remaining headwind is our wireless backhaul revenue decline, but that was anticipated. Once we fully work through the transition in wireless backhaul during the first half of 2014, we expect the business segment to be well positioned to deliver sustainable sequential revenue growth. After three solid quarters of revenue improvement, we believe we have turned the corner in successfully mitigating revenue decline and in moving closer to our objective of growing revenue.

Please turn to Slide 6. Our improved revenue trajectory is being driven primarily by broadband net addition and year-over-year improvement in customer retention. We added approximately 27,000 net broadband additions in Q3. This strong showing was helped by our continued progress of alternate channel sales mitigating the normal seasonal softness of new sales in the summer months. Year-to-date, we have added 84,500 net broadband customers. Approximately 84% of gross additions in the quarter included broadband as part of the package.

We truly believe that simplicity and consistency of our offers in the marketplace coupled with the right channel incentives are the drivers of this strong uptake. Another contributing factor is Frontier Secure. About a quarter of our residential broadband base already subscribes to Frontier Secure and we expect this to continue to trend higher, as customers rely more on broadband for their daily activity, and online extension and interaction, securing their experience becomes even more important to them.

Frontier’s greatest opportunity is to drive broadband penetration and increase our share of that addressable market. We took share once again this quarter from our cable competitors. Our broadband market share on average is between 20% and 25% of total homes past. So we know there is still a lot of runway to get our 40% minimum target share. Broadband share growth and add-on products like Frontier Secure and speed upgrades for both residential and small business sectors are the largest revenue improvement opportunities we have at Frontier for the foreseeable future. Thus far, our Q4 momentum is solid on the broadband front based upon October results.

Please turn to Slide 7. The third quarter marked our fourth quarter of sequential growth in residential data revenue. We have maintained our ability to offset secular declines in voice revenues with increases in our data revenues. These reflect our focus on keeping existing customers, converting win backs and upgrading customers to higher speed packages.

Please turn to Slide 8. Keeping customers is key to revenue growth and profitability. Residential retention improved in Q3 by more than 56% year-over-year. Q3 retention results are the second best quarter we have had since 2010, right behind our Q2 results. The slight increase in deactivations in Q3 are attributable to the expected vacation home disconnects that we experience every September, and to a customer migration we completed in the quarter to move customers off all of legacy packages. The extensive work over the past few years to improve our networks, simplify how we do business, sharpen our focus on customer service, promote the right offers to the right customer segment and engage locally, have truly made a difference in keeping customers and driving data revenue.

On Slide 9, we show our continued discipline in managing our cost. Despite the increased cost to support accelerated growth in customers for the first three quarters of this year, and seasonally higher storm-related costs that we had in Q3, we still maintained a healthy 46.3% margin. Some of our cost savings have been reinvested in selected projects to fuel additional revenue and customer growth.

So in summary, we are pleased with the progress we have made this quarter and are increasingly confident that our investment in people, products, process improvements and our network will benefit our business and our stakeholders through the remainder of this year and into 2014. I also want to thank our employees for their hard work, their dedication to Frontier and their focus on serving our customers. Their performance is making a difference each and every day.

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

Daniel McCarthy

Thanks, Maggie. I’d like to start by discussing our residential and business segments results. Please turn to Slide 10. We had another very solid quarter in the residential segment. We continued our very successful broadband offerings in Q3. This has been well received in our markets, thanks to the compelling value proposition it offers customers. We once again took market share from our competitors in 75% of our markets. Recent cable price increases have made our offers even more attractive and we have not seen any sustained competitive responses to our offerings.

Residential ARPC benefited from increases in high-speed broadband sales and products in the Frontier Secure family. Further, we were able to increase our Access Recovery Charge to offset the ICC Reform rate change that negatively impacted our regulatory revenue. Alternate channel distribution accounted for approximately 30% of gross additions matching Q2 performance and up 10% from Q1 2013.

Alternate channels are an important part of our distribution strategy. These channels provide a balanced sales approach that offset some of the seasonality seen in our traditional channels. Call volumes in our call center should increase after Thanksgiving, so we expect solid Q4 new sales performance from all of our channels as we finish the year.

Please turn to Slide 11. We continue to make significant improvements in our Business segment’s operating trends. We are pleased to report that small, medium, enterprise portion of business was stable on a sequential basis, which we believe is a substantial accomplishment. While Q3 results in SME were a dramatic step forward, there is still room for further improvement in this segment.

Our focus for Q4 remains the same; improving customer retention and growing market share. The initial response to our new packages for small business has been very strong. We think the simple plans and straightforward pricing has positioned us as a more relevant option in the market. Small business Alternate Channels are coming online in Q4, so that should help us rent new sales even faster.

CPE sales were also positive in Q3, but far more important than the equipment sales itself is the monthly recurring revenue for telecommunications and equipment services that is part of every sale. We are leveraging our local presence and scale in our markets, which is important because most CPE competitors tend to be too small to provide local maintenance support. We delivered real value to our customers, because our CPE offering is serviced locally by our technicians in every market making us unique in response time commitments.

For larger customers, we have expanded Ethernet availability substantially. Ethernet revenue increased quarter-over-quarter and year-over-year. The sales pipeline has increased in Q4 with new distribution partners coming online with this product sale. As previously discussed we’ve factored a $25 million to $35 million decline in wireless backhaul revenues into our 2015 guidance. I want to reemphasis that we anticipate further declines in wireless backhaul revenues through the first half of 2014 before we see backhaul revenue stabilization. In late 2014 we will have a platform for backhaul growth that should continue into 2015.

Slide 12, updates the progress we are making on our network. We have several significant initiatives underway. We are completing our broadband expansion program and implementing a CAF 1 Phase 1 area build outs. Through the first nine-months of 2013 we have invested over $21 million of previously received CAF funding to expand our network. In Q3, we turned up 37,000 additional households in both categories and we expect to expand to more than 30,000 in Q4. We’ve applied for $71.5 million in CAF 1 Phase 2 and are awaiting the SECs decision.

We’ve made substantial progress in our build to Ethernet to wireless towers and expect much of this work to be completed in Q4. In addition our Gigabit Ethernet service for medium and larger business customers is now available in 86% of our exchanges. The next phase in our build will be to add capability for premium Ethernet services, which will also enable us to charge differently for higher tiers and services. We continue to invest in network speed and capacity to support our goal of driving broadband penetration. Customers are beginning to purchase higher speed broadband services. In Q3 over 20% of broadband growth additions were above the basic speed tier.

We believe we are well positioned to track more customers seeking migration path to higher speed products. The availability of higher speed tiers continues to expand. By the end of Q3 45% of households were capable 20 Meg or greater and 58% were capable of 12 Meg. As you know, we had commitments related to the 2010 acquisition regarding broadband speeds, at the end of Q3, 84.7% of household in acquired markets were capable of 3 Meg broadband speeds. So we are very close to meeting our year-end commitment of 85%.

I believe that our improved network capabilities are resulting in higher levels of customer satisfaction and contributing to our success in the market place. In summary, we have improved our key metrics through better product offerings, expanded distribution channels, coordinated local engagement marketing and substantial investment in our network and systems. We are very pleased with our progress and we’ll remain focused on driving results in Q4.

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

John M. Jureller

Thank you, Dan. Let me review the third quarters financial results. Overall, Frontier has earnings per share of $0.04 in the third quarter of 2013 as compared to earnings per share of $0.07 in the third quarter of 2012 and a loss of $0.04 in the second quarter of 2013. Adjusting for pension settlement cost severance costs in discrete tax items our non-GAAP adjusted net income was $0.06 per share as compared to $0.06 per share in the second quarter of 2013. On October 31, the board declared a quarterly dividend payment of $0.10 per share in line with expectations.

Slide 13, shows our revenue composition. Our GAAP revenues for the quarter were $1.185 billion, a decline of only $5 million or 0.4% sequentially. Customer data and internet services revenue increased $3.8 million versus the second quarter of 2013, 0.8% increase. Partially offsetting the sequentially data revenue improvement was a decline in local and long distance voice services revenue of $3.7 million or 0.7% as compared to second quarter of 2013. Regulatory revenue for the quarter was $135 million or a decrease of 2.5% sequentially principally due to the expected decline in switched access partially offset by an increase in subsides.

Total residential revenue was $506.1 million an increase of $0.6 million sequentially. Business revenue of $544 million was down $0.4 sequentially. As commented by Maggie and Dan, this reflects stability in small and medium – small, medium and enterprise revenue and an increasing carrier revenue offset by the anticipated decline in wireless backhaul revenue. This was the best sequential revenue performance within SME since the 2010 acquisition.

Slide 14 provides an analysis of our average revenue per customer. In residential, average revenue per customer or ARPC, $59.56 represents a 0.8% sequential increase and 1.4% over the prior year. We are pleased that ARPC continues to move higher, benefiting from bundled package migrations, including higher speeds, a continuing higher mix of customers with our broadband product and a strong attachment rate of our Frontier Secure services. Business ARPC was 0.7% higher sequentially and 1% higher over the prior year, with improvements in products and pricing providing a lift over the second quarter. Further, while our total number of business customers declined in the quarter, we estimate that our overall market share was stable to slightly up and we did pick up more enterprise level businesses, which improves our business ARPC.

Turning to cash expenses. As shown on Slide 15, our cash expenses increased by $3 million sequentially in the quarter, but was down by $22 million relative to the fourth quarter of 2012. Cash operating expenses were up relative to Q2 2013, because of increased investments towards growth initiatives as mentioned in last quarter’s call and higher labor expense to address the impacts of storm activity in Q3. Our total quarter end headcount was 1% lower at the end of Q3 as compared to Q2 and down 8.6% from the end of Q3 2012.

Our expense management focus resulted in relative stability in our adjusted EBITDA margin even with the additional investment and strong cost. Adjusted EBITDA margin was 46.3% for the third quarter of 2013, down slightly from 46.8% in Q2. The entire company remains committed to deliver our cost reduction objectives for the year, focusing on process, productivity and customer facing enhancements to allow us to be more effective and efficient in our daily operations.

We spent a $157 million in capital expenditures during the third quarter of 2013, an increase of $20 million compared to the second quarter. Year-to-date we have spent $484 million in capital expenditures. We continue to spend to upgrade networks speed and capacity, where we can drive the greatest revenue impact and to fund planned wireless backhaul projects. In addition, to our capital spending, we also used $11.8 million in Q3 and $21 million year-to-date of the SEC Connect America Fund monies that we previously received to expand broadband reach. Frontier's cash flow, as shown on Slide 16, remains very healthy. On a trailing four quarter basis, our cash flow from operations less capital expenditures increased over the prior periods and was $791 million. Our dividend payout ratio was 43% in the third quarter and at a quite comfortable level of 49% for the year-to-date.

On Slide 17, we update our leverage ratio and liquidity. Frontier's liquidity remains strong. We ended the quarter with $1.4 billion in cash and credit availability, an increase of over $100 million in the quarter. Year-to-date, we reduced our gross debt by $799 million and our net debt was $7.5 billion at the end of the quarter. Overall, our quarter end leverage ratio was modestly improved over Q2.

On Slide 18, we illustrate our long-term debt maturity profile. Similar to our comments at the end of the second quarter, we continued to expect to repay existing debt maturities comfortably with cash on hand and free cash flow from operations through 2017 or 2018 without the need for additional financing.

We are reaffirming our 2013 guidance, as outlined on slide 19. Our guidance for free cash flow remains a range of $825 million to $925 million. Our guidance for capital expenditure remains a range of $625 million to $725 million. Our guidance of cash taxes remains a range of $125 million to $150 million. In summary, Frontier's operating results, prudent capital investments and expense management provide a strong cash flow base and a solid financial platform for supporting and investing in the business, servicing our debt and maintaining our dividend payout.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Batya Levi with UBS. Please go ahead.

Batya Levi – UBS Securities LLC

Great. Thanks. I was wondering if you could provide some color on ARPC trends especially in the Residential segment, maybe if you could quantify the impact from the slick increases that you saw in the quarter and as you transition the base to the new pricing plans, how should we think about Residential ARPC to trend going forward? Do you think that we can – the growth has been decelerating slightly, do you think that it could sustain the positive territory into next year? Thanks.

John M. Jureller

Hi, Batya, it’s John. We don’t break out individual numbers within ARPC, but let me just say, we had ARPC benefit from a number of things. We had ARPC increase. We also have a greater attachment rate for Frontier Secure, and on blended basis, as more of our customers take Frontier Secure; that really adds to it as well; as we commented as well, a greater mix of our customers overall, our broadband customers, and as we’ve said in the past, our broadband customers drive higher ARPC than just the voice only. So as we drive broadband through all of our markets, that helps in ARPC. So the combination of those three factors as well as migrating customers off of some outdated legacy packages, have really provided that lift and we think some good momentum as continuing into the fourth quarter.

Batya Levi – UBS

Okay. Thanks.

Operator

Thank you. We’ll go next to Frank Louthan with Raymond James. Please go ahead.

Frank G. Louthan – Raymond James & Associates, Inc.

Great thank you. Can you talk to us a little about – a little bit of the share loss in the Business side? Who are you losing to and then is there a point where we could possibly see that grow maybe getting some more traction with some larger customers that are sort of above the ARPU? And then, you mentioned you've got some simplified offerings to some of the SMB customers, can you characterize those, give us a little bit more color on what's exactly in those packages that you didn't have before?

John M. Jureller

Sure, Frank. I’ll start with the last part of your question. In the quarter, we introduced a very simplified offer. There are a lot of people to take broadband product and then add a full-service [indiscernible] line with full features as well as unlimited [indiscernible] at a very compelling price point with the ability to move up in $10 increments for higher broadband speeds. In addition, one of the other big issues historically we had faced was the incremental cost for somebody who wanted a second or third line that was added to the business. So we solved all those issues as we changed our bundle strategy, and almost immediately we saw lift in the small space that is really the target for that bundle.

So I would say in the early part of the quarter, we were losing a small amount of customers to different cable companies, really not to see like so we’re going after that business. And in some cases, it was just macroeconomic factors, where there was a decline in the businesses in certain markets, so the combination of the two. But we were very happy when we saw the trends that started with the new bundle strategy and the result is that we have seen good sales and we’re starting to see a good traction on the revenue side as well.

Maggie Wilderotter

Hi, Frank, it’s Maggie. I also think that we’ve not just repositioned the packaging, but we’ve also repositioned distribution for small business and we have new alternate channels that have come online for the fourth quarter. So we did see a list that we’re continuing to see in share on the small and medium business side and I think you’ll see us continue to drive that share just like we did the playbook for residential and really maximizing alternate channels as part of the strategy.

Frank G. Louthan – Raymond James & Associates, Inc.

And can you characterize some of those alternate channels, so these are master sales agents or what other sorts of channels, can you be a little more specific?

John M. Jureller

Yes, Frank. It is a combination of master and sub agents. It’s a combination of digital outside marketing and some of our traditional players that have been very successful on the residential side, we’re moving them over, and trying them on the business side as well.

Maggie Wilderotter

A number of the aggregators too that we have online too, Frank.

Frank G. Louthan – Raymond James & Associates, Inc.

Okay, great. Thank you.

Operator

Thank you. We’ll go next to David Barden with Bank of America. Please go ahead.

David W. Barden – Bank of America Merrill Lynch

Hey, guys. Thanks a lot. I think Maggie called out some storm expenses that kind of were a headwind in the third quarter, could you kind of elaborate a little bit like were they larger than typical, and if so, to what magnitude did they weigh on the margins this period? And then, I think also on the enterprise side, just it sounds like the biggest headwind for the next several quarters is going to be the fiber-to-the-cell site conversion, some of the business that you might be losing to some of those competitive contracts. And then it starts to level out in the middle of next year, what is the magnitude of what’s the risk still inside that business segment from that revenue stream, it will be helpful to kind of get some context? Thank you very much.

Maggie Wilderotter

Hi, David. So I’m going to start off, talk a little bit about the storm expenses in the third quarter, and then Dan will weigh in on the backhaul and sort of the puts and takes on the towers. We did – in July, we had, I’d say, several storms in multiple states, so it wasn’t just in one specific area and the storm cost increase in the month of July was around $11 million and it’s all labor, it’s all over time to get customers back in service. The good news is it’s a one-time shot, and with August and September, it was quiet. So over time came right back down to basically no over time in those months. So the blip that we saw in operating expense increases, if you look at our increase quarter-over-quarter, it was basically $11 million. So it’s all in these over time costs that we occurred in the first month of the quarter. So that is really, it’s come and gone, typically those are store months for us and July just happened to hit with a vengeance and the good news is August and September, it got quiet again.

Daniel McCarthy

Yes. and this is Dan, one the wireless backhaul, I think you categorized it correctly. We had a growth in the typical carrier book of business; we had stability to even slightly positive results in the SME segment. the wireless backhaul was the drag on the commercial segment in the quarter. We do anticipate that we will see more of that in Q4 in the first half of next year. And just to give you a flavor, most of the towers that we’ve lost to competitors at this point have been exiting the business. Our guess is that at this point 70% to 75% of the total revenue associated with either the migration from TDM to Ethernet or competitive losses has worked its way through the income statement at this point.

The main impact that we see as we go into Q4 next year are going to be any towers that we complete for our partners. so we will see some decline on the TM side. and then we’ll see Ethernet revenue began. We completed at the end of Q3, 3,001 towers, we expect to build like the day, we expect to build about 308 more towers again, by the end of this year. And then it leaves us above 286 towers in the beginning of next year and there could be some other towers that partners want us to build to. but that’s kind of the magnitude, so you can get a feel out of our 7,200 towers plus lot for us to work on and then that will work through the revenue stream in Q4 and in the first half of next year.

David W. Barden – Bank of America Merrill Lynch

All right guys, thanks much.

Operator

Thank you. we’ll go next to Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery – Morgan Stanley & Co. LLC

Okay, thanks a lot. And John sort of continuing on that investment theme, you got a nice drop in your year-over-year CapEx up a bit sequentially. can you just help us with the shape of the CapEx as we head into over the sort of next four to six quarters as we wind down some of the construction progress. And then on the broadband, it’s helpful getting the share numbers and the penetration and the goals. Can you break that out between the legacy Frontier and some of the acquired markets and where you’re really seeing the greatest penetration gains now? Thanks.

John M. Jureller

I’ll take the CapEx question. I’ll kick sort of share gains back to Dan. On the CapEx question, we’ll provide further guidance on 2014 when we do our Q4 earnings call, but we’re going to continue to reinvest appropriately in our network as we go through, as aided as well by the cap – our part one, Phase I monies that we got and to the extent that part one Phase 2 money is coming as well, so we have a lot of different ways that we’ll continue to make sure that our network is robust, and its delivering the product and services that we need, but in total I think we’ll get some more guidance on that – when we do our Q4 update.

Daniel McCarthy

Yes, Simon on the broadband share of legacy versus the acquired, we don’t really even think of it that way any more, because there has been commingling of assets in certain state like Illinois, but I will tell you that we have had success in 75% of our markets and that is a broad mix of both acquired as well as legacy, markets that we had been stable and maybe even declining in the past has been reintegrated with the new simple offer, so we are taking share in places where we had not before and we continue to do that each and everyday. So I’m very bullish on it, there is some market where we have very high market share in the legacy areas that are pretty stable, but in general we are taking market share both in acquired as well as the historic where you see operations.

Maggie Wilderotter

Yes, Simon this is Maggie just a kind of elaborate a little bit more on that to, what we’ve done in the legacy markets is we are protecting the base we have, so even the 25% that didn’t grow share in the quarter most of them are flat they are not necessarily losing shares. So in some of those very high market share markets already these new products are also resonating in those markets to keep share flat and to not lose share to the cable competitors. But I think at the end of the day we still have huge opportunity in the acquired markets to grow share that’s where we have still the lowest share numbers if you look at a number of those states that we’ve acquired – even states like Michigan and Indianan are still very low, even West Virginia that we’ve been growing share on West Virginia for the last couple of years we still have a lot of share growth that we can bring compare in those markets as well.

Daniel McCarthy

Simon just add to is when we are opening up markets for the first time with our CAF money or our own money’s as well, we are seeing some very, very solid market shares right away for those first time markets and so that’s – it’s a great sign for us.

Maggie Wilderotter

Yes, in some of those markets Simon we are seeing 30% to 50% uptick.

Simon Flannery – Morgan Stanley & Co. LLC

And those are people switching from cable or they didn’t have broadband or?

Maggie Wilderotter

Most of them didn’t have broadband at all.

Simon Flannery – Morgan Stanley & Co. LLC

Okay.

Maggie Wilderotter

So you know just getting the word of mouth out there in the first couple of months, we’ll see some pretty good pop and as Dan outlined, putting on or turning up 30,000 or 35,000 households a quarter in those areas where there is no other opportunity for broadband other than satellite, we are doing a very good job of conversion and when we bring those online as he mentioned, its usually takes us three months, after we get them online, you groom them and you go through the sales process to really start putting the numbers on.

John M. Jureller

Yes. And the numbers that we put on this quarter, Simon really we’re back-end of the quarter as far as the construction season. So we should start to see the benefit as Maggie pointed out as we market to them over the next three months.

Simon Flannery – Morgan Stanley & Co. LLC

Great, thank you.

Operator

Thank you. We’ll go next to Michael Rollins with Citi. Please go ahead.

Michael I. Rollins – Citigroup Global Markets Inc.

Hi, thanks for taking the question. Couple of things, number one is,, could you talk a little bit more about what’s going with the CPE, maybe how much that grew in the quarters and the types of product that you’re selling to your customers. And then secondly, you know its taking a step back, what are you seeing in terms of broadband usage of your customers, how different is it for where you have a much faster speed versus where you might have a more heritage DSL speed? Thanks.

Maggie Wilderotter

Dan, do you want to take the CPE question and talk a little bit about CPE product types and growth?

Daniel McCarthy

So Mike, on the CPE front, we have partnerships of the couple of major providers, Mitel, Cisco and Avaya and then some very specialized CPE vendors in the 911 space. So most of our growth, though has been kind of in the blocking tackling, kind of in the small midsize space that either uses Avaya, Cisco or Mitel. As you may not know, we were the number one Mitel partner in the U.S., last year, we continued on that trend, so most of the systems are IT PBX that are replacing either small key systems or aged legacy TDM kind of PBX systems that were either Nortel or some other equipment manufacturer.

It was very nice growth for us, what the nice part of it is, it’s an entrée into the customers, it gives us to win them back if they might have gone to TLX [ph] in some cases or over to a cable competitor. And again, we’re one of the only ones that can provide that suite of products and services. I will say one of the big selling points for us is that we can also offer a hosted PBX system in the cloud using our Mitel partnership and it’s very the same look, feel interface that a customer would have with the IP PBX. And as a result it’s a nice migration path that somebody wants to grow further, so that’s another key selling pong for us on that.

Maggie Wilderotter

Let me talk a little bit about broadband usage. We continue to monitor how our customers are using broadband and again not all customers are created equal and they will all use it very differently Michael I think. If we look across the broad the fastest growing category is video, so I would say upwards is over 30% of the traffic on our network,, just about everywhere is streaming video and whether that’s YouTube or Netflix or customers creating video that is all part of that broadband experience that continues to be very high growth.

The customers that upgrade on the tiers to 12 meg, 20 meg or even in files markets 40 megs and 50 megs. On the residential side are usually work at home, they are VPNing, they are gamers and they are very active on video and social as well. So we do try to tailor the packages based upon the type of activities that the customers are doing, but I think as Dan mentioned even last quarter the majority of our customers still take 6 megs. I mean you can have a good Netflix experience on our network with 6 megs and for surfing the web and for watching an occasional video on Netflix or just basically e-mail services that’s typically what most of our customers are using the broadband pipe for. But we want to be prepared as there is more innovation on broadband. We are going to see more and more opportunities not just pressure on the network but also opportunities to up sell o different tiers.

Dan McCarthy

And Mike this is Danny and I would just add that the average usage of all our customers across both fiber and – the copper as grown to about 24 Gig at this point, and we see that increasing and people are comfortable with he amount of inner office facilities as well as our backhaul to support that growth. So we’ve seen that grows virtually every month as we move forth.

Michael I. Rollins – Citigroup Global Markets Inc.

And let me just ask one other quick question on the usage. Do you guys look specifically at how much is down to the customer versus up and a sense of how much that waiting is down?

Dan McCarthy

We do and I would say the vast majority – I don’t have the number right in front of me Mike, I would say the vast majority is still down.

Michael I. Rollins – Citigroup Global Markets Inc.

Thanks very much.

Maggie Wilderotter

So operator we’ll take one more question.

Operator

Certainly, we’ll take our final question from Scott Goldman with Goldman Sachs. Please go ahead.

Scott Goldman – Goldman Sachs & Co.

Hi good afternoon that’s for squeezing me in. I guess two questions, one John maybe if you could just update us as bit on where you guys are on your cost saving initiatives relative to where you mapped out to the year earlier this year, also saw that you guys sign a couple of contracts, I think with the CWA and perhaps, other unions. Wondering how we should think about what impact that could have and when maybe some potential savings from that could layer in. And secondly maybe, Dan, maybe you just comment a bit on the residential customer churn that kicked up a bit this quarter, didn’t see seasonality in the year-ago quarter, wondering if there’s anything we should be thinking about as far as seasonality or other impact this fiscal around? Thanks.

Daniel McCarthy

Yes, Scott. Let me take – firstly take the cost savings question. we are on target with our initiatives. As we said, we had a big challenge in front of us, our entire management, our entire organization for this year and we’re meeting that challenge. We’re reinvesting a little bit to support the growth in our business and the growth in our distribution channels, but we remain confident that we’re on target for the year. And we remain confident that we got beginning to get sideline now, an opportunity is as we carry forward into 2014. Ken will talk more specifically on guidance as we give your Q4 numbers, but I think the technology investments that we’re making in process improvements, both things that are both internal as well as customer facing are really starting to payoff for us and we really see more runway for us, as we get into next year.

Maggie Wilderotter

Yes. I would add, Scott that we also have about – in the last 12 months, our workforce is down 8%. So we’ve also right sized the business as we’ve gotten out of integration, as we’ve done a number of things on automation process improvements and implication. so we are definitely on track to meet the objectives for cost reduction for the year. I think as you know, it’s sort of business as usual for Frontier. We’ve always been company that praise ourselves in being efficient, effective and only three looking at the business everything single year to make sure that we’re doing the right thing to keep cost down.

Daniel McCarthy

I’d just say, Scott that the union success in the negotiation that’s been a great accomplishment for our labor team see, 2014 savings and we’ll see primarily in both operational flexibility, some performance based pay in our call centers, some benefits contributions 401k costs and retired medical cost for new hire. So those are the principle areas we’ll see and we’ll be making that into our plan for next year. It’s prior to see a residential customer churn. It was really divided on the sequence of two components; the first one was associated with migration that Maggie touched on that in her opening remarks.

If you think about it, we had identified a number of customers that were below what we felt was market based pricing for broadband services and we went ahead and we made some price increases. Those price increases were actually very good for us from a net revenue perspective and we expected to have some churns occur as a result of those increases and about half of the up-tick was really caused by that. The other half of the up-tick is really around seasonality and the reason you may not have seen it in the past is simply that as we’ve grown our broadband footprint, we are actually expanding into a lot of vacation communities that Verizon had never served before from a broadband perspective, and as a result, we are seeing some seasonality.

We knew that would be the case in places like West and North Carolina and other states that are very heavy vacation areas. So we will see those things occur in the third quarter of each year. So that's – it was equally divided between the two, but we’re actually very happy with the results from the migration and it was expected on the seasonality.

Maggie Wilderotter

And operator, I think we do have one more question in the queue. So I think we’ll take the last question.

Operator

Sure. we’ll go to Jonathan Epstein with Deutsche Bank. Please go ahead.

Jonathan G. Epstein – Deutsche Bank Securities, Inc.

Hi. Thanks for taking the questions. In the CAF markets, where you have minimal competition, what broadband speeds are you providing out of the gate relative to the rest of footprint? And are there opportunities for ARPC gains over times based on potential speed upgrades? And how do you think about new promotions expected from cable this quarter be they tablet promotions or cheaper modems, is this something that you would have to respond to?

John M. Jureller

Yes, so first off on the CAF areas that we’re building, we are meeting the requirements for the three or four meg based products, but at the same time, the technology that we’re deploying actually allows us to offer our ultimate. So I absolutely think there is an opportunity for ARPC improvements as we move people up in speed tiers and it’s just been a little bit longer process of getting those carriers turns up just because they tend to be the harder construction area. So as we turn them up now, I'm expecting to see nice lift both in the base product set as well as speed availability. For some of these customers, it’s the first time that they’ve had a broadband product available. So they may very well come on in a base speed and then we’ll be up selling them as we go along.

Daniel McCarthy

Yes. So first off on the cap areas that we’re building, remaining the requirements for the three our four meg based products, but at the same time, the technology that we’re deploying actually allows us to offer our ultimate. So I absolutely think there is an opportunity for ARPC improvements, as we move people up in speed tiers. And it’s just been a little bit process of getting those areas turned up, just because they tend to be the harder construction area. So as we turn them up now, I’m expecting to see nice lift both in the base products that as well as our speed availability for some of these customers. It’s the first time that they’ve had broadband product available. So then they very well come on in a base speed, and then we’ll be up-selling them as we go along.

Maggie Wilderotter

Yes, I would, Jonathan, add on the cable competition side, I know Dan mentioned in his opening remarks that we really haven’t seen any sustainable programs that cable has put against us in the market and we do know that several cable operators have said they’re going to do more in those areas. We are very well prepared for that, but remember with our bundles, what we’ve done with our bundles is not promotion. What we’ve done is we’ve given sort of everyday low pricing to the customer that’s simple and predictable there are no add on fees, there are no modem fees for broadband, it’s a simple $19.99 or $29.99 and that can bundled with our other products and services and there is no contract.

So on the residential side we think we have a very strong offer that can sustain a promotion, we’ve also seen that one other reason why we are taking share is the cable guys continue to increases prices, I mean Time Warner has increased their modem fees in some cases its between $6 and $9 is have modem with broadband. That’s huge price increase for a lot of customers, you compare those to Frontier that as no modem cost and the customers do understand where price value lies.

Yes, I think we’ve also see that Comcast, they have raised their rates as well. so what we are doing here is keeping our head down, we’re building share, we have simplified to offers and we are some good twist to those offers that we’re going to do in the fourth quarter as well. We are not going to elaborate on our conference call here on what those are we do like surprise in the marketplace. But we feel we are well prepared to fight against the competition and we think we have network parity with our competition in the marketplace as well as a better customer experience all the way around.

Jonathan G. Epstein – Deutsche Bank Securities, Inc.

That’s great thanks for all color.

Maggie Wilderotter

Well, thank you all for joining us for this call. As I said in the beginning we are very pleased with the momentum we’ve continued in the third quarter and expect that to continue into the fourth quarter. So we look forward giving you both fourth quarter and year end results in February. Thanks again.

Operator

This concludes today’s program. We appreciate you participation. You may now disconnect, have a great day.

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