FairPoint Communications' (FRP) CEO Paul Sun on Q4 2015 Results - Earnings Call Transcript

FairPoint Communications, Inc. (NASDAQ:FRP)

Q4 2015 Earnings Conference Call

March 2, 2016 8:30 AM ET

Executives

Paul Taaffe – Vice President-Investor Relations

Paul Sunu – Chief Executive Officer

Ajay Sabherwal – Chief Financial Officer

Analysts

Scott Goldman – Jefferies

Barry Sine – Drexel

Jen Ganzi – NewMark Capital

Stephen Asabod – McMahon Capital

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Four 2015 FairPoint Communications Inc. Earnings Conference Call. My name is Sheela and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I’d like to turn the call over to Mr. Paul Taaffe, Vice President, Investor Relations. Please proceed, sir.

Paul Taaffe

Good morning, everyone. Our speakers today are Paul Sunu, Chief Executive Officer; and Ajay Sabherwal, Chief Financial Officer. I would like to remind you that certain statements made during this call, which are not based on historical facts, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements.

With that, I’ll turn the call over to our CEO, Paul Sunu.

Paul Sunu

Great thank you, Paul. Good morning. Thank you for joining us. As I reflect on 2015, let me start by expressing my appreciation for the efforts of the team to deliver what I feel was an exceptional year in the face of many challenges. The year began with the ending of the strike and the February ratification of the new collective bargaining agreements with our northern New England unions. The new agreements furthered the transformation and development of the Company by reducing over $680 million of liabilities off the balance sheet, providing ongoing cost reduction opportunities and enhancing operational flexibility to provide further efficiencies and improved service to our customers.

In addition, while there were numerous challenges during the strike including aggressive picketing, sabotage and one of the worst winter storm seasons in decades, our team displayed true ingenuity and creativity and created new processes and implemented new procedures to significantly improve performance to better serve our customers.

We’ve worked hard over the past five years to execute on our four-pillar strategy and along the way, we’ve created an outstanding operating platform and a strong foundation for growth. I think you can see this in our fourth-quarter and fiscal 2015 results. Our proven ability to manage cost and improved performance resulted in delivering EBITDA at the high-end of our guidance range.

Fourth-quarter revenue was generally in line with our expectations and we were able to deliver unlevered free cash flow at the midpoint of our guidance range even after we pushed CapEx a bit higher to get a jumpstart on our CAF II bills.

Overall, we had an exceptional year; a year that allowed us to complete the development of our operating platform and provides us with positive momentum heading into 2016. With this strong foundation, we are now ready to take the next natural step, shifting from development to performance by leveraging our assets and competitive advantages.

Our strategic priorities now focus on, one, providing excellent customer service; two, enhancing the network, the largest and most ubiquitous fiber network in northern New England; three, developing effective and secure communications solutions; and four, generating new revenues while sustaining existing revenues.

Let me spend a few moments highlighting the progress we’ve made and opportunities we see in the near term. First, the fundamental element of building reputational capital and support for any company or brand is providing exceptional customer service. We have utilized the flexibility provided by the new collective bargaining agreements as well as a renewed internal focus on customer service to drive performance improvements. In addition, there is a noticeable shift in our culture as our teams have a winning attitude. For instance, our operations organization has adopted the mantra, we are the brand, taking ownership and leading the way toward providing outstanding customer service.

Our trouble load continues to trend at historic lows, which creates a virtuous cycle of reducing repair time, resulting in fewer repair calls into the call center and lowering over time. And with more available time, we can improve the quality of service and harden the network to prevent future troubles. As one measure of our success the average lifespan of a broadband trouble ticket from initial reporting to resolution has declined over 30% over the past year, excluding the strike impacted period.

We also continue to build on our strong reputation with business customers. We’re known for our ability to deliver on complex projects and have the systems and teams in place to respond quickly when needed. A great example is the recent New Hampshire primary where our teams connected over 400 circuits to more than 35 locations for local, national and international media to cover the event. We expect that over time, the improvements we are making will yield greater brand loyalty and customer churn.

Second, we continue to make investments in our network to extend service to unserved and underserved areas and improved service in other markets, leveraging our 21,000 miles of fiber across the country. We are improving the availability of broadband service by utilizing VDSL, bonded and other technologies to increase offered broadband speeds.

In December, we announced the availability of 1 gig Internet service in Portsmouth, New Hampshire, and our work to enable higher speeds continues into 2016. In addition, our August acceptance of CAF II provides financial support to extend the network to certain unserved and underserved locations in our service areas. Using our outstanding complex project management platform, we are confident we have the wherewithal to complete this six-year project on time and on budget. And in the near-term, we expect to meet or exceed the FCC’s 2017 year-end mandate of 40% completion.

Overall, we expect to be able to maintain our CapEx level in the low teens as a percentage of total revenue while we deliver this needed bandwidth to these high-cost and hard-to-reach locations. The combination of an enhanced network and improved customer service provides critical support to our expectation that broadband subscriber counts will return to growth in 2016.

Third, our project development teams are working to anticipate customer needs and develop new products and services that ensure our continued relevance in the marketplace. Examples of our success in 2015 included expanding the geographic footprint of our data offerings by converting space in an existing facility in Manchester, New Hampshire. This is our second data center, providing colocation and disaster recovery services. We also built on the successful implementation of Maine NG 9-1-1 system by completing the installation of the Vermont NG 9-1-1 system in July of 2015.

Finally, we have seen growing success with our host of products and we plan to continue to develop feature-rich, flexible IT-based products. We continue to monitor the evolution of our industry and supported by the past successes, I’m confident we have the processes in place to develop the appropriate products and services to meet our customers’ needs.

Fourth, we continue to focus on generating new revenue and sustaining existing revenue through an appropriate balance of transactional and relationship selling. I mention this focus last because success here is highly dependent on both operational excellence and product leadership. We’ve made tremendous progress on operating with excellence, but certainly, reputational capital gained through delivering excellent customer service helps this effort.

In addition, our product portfolio today ensures we are competitive but our aim is to be the leading provider of effective and secure communications solutions in our serving area. I believe we have all the components to make this happen. Our sales teams are generating new bookings and building new and strengthening existing relationships with our customers. All of these efforts are intended to aid in our revenue transformation efforts and mitigate revenue losses.

As an indication of our revenue transformation progress, growth revenue made up nearly 30% of our total revenue, up from a little more than 27% in the fourth quarter of 2014, and only approximately 13% in 2011 when we began our transformation efforts. The strategic revenue presentation provided in our earnings release gives visibility to our ongoing work and I look forward to providing regular updates on initiatives designed to further this effort. The FairPoint team has worked hard over the past five years to build a strong foundation and I believe we are now a high-functioning company but we can still improve.

For instance, we are now ready to start consolidating operating platforms between NNE and TG. We currently operate separate systems for TG and NNE, as in the early days after cut over from Verizon and NE systems had challenges. Today, we have confidence in our operating systems and our technology organization so it is only natural to bring these two operating systems together. We will start with our accounting and HR systems this year.

Now, it goes without saying, but we are keenly focused on enhancing shareholder value and our strong foundation provides more opportunities that we have had in years. We are becoming ever more relevant in our evolving and competitive industry. We expect to better serve our customers, strengthen our network, develop new products and transformed to a more sustainable revenue stream. I am confident all of our efforts to improve our operating platform positions us to be an active participant in our consolidating industry. But industry consolidation as well as opportunistic refinancing are partially dependent upon the availability of financing on reasonable terms.

And so with that, thank you again for your interest and the support of FairPoint and I will turn it over to Ajay to discuss our financial results.

Ajay Sabherwal

Thank you, Paul, and good morning, everyone. I will discuss our quarterly results and focus on the sequential comparison of the fourth quarter versus the third quarter. First, some highlights for the quarter. We had a solid quarter that was better than our expectations and I am pleased with our performance. For the year we delivered adjusted EBITDA of $255.9 million and unlevered free cash flow of $120 million. And in the fourth quarter, we generated adjusted EBITDA of $63.9 million and unlevered free cash flow of $23.3 million.

And we are establishing guidance for 2016. That demonstrates our continued commitment to reducing the rate of revenue decline while delivering strong unlevered free cash flow.

As I have noted on prior earnings calls, to enable comparison with the fourth quarter of 2014 and the first quarter of 2015 when there was a strike, in our calculation of adjusted EBITDA for those quarters, we added back the cost of labor negotiation-related expenses and subtracted an estimate of a union-represented costs that would otherwise have occurred. We used a rolling 12-month average of historic costs for the estimate and labeled those costs estimated avoided costs. While no such treatment is required for Q4, as the strike ended in February, full-year references for adjusted EBITDA and unlevered free cash flow deduct estimated avoided costs in this manner.

Now, the details of the quarter. We reported revenues of $209.8 million in Q4, which was generally in line with our expectations. That compared to $221.6 million in Q3, and $11.8 million decline quarter-over-quarter. This anticipated decrease was driven by a few factors. First, we saw a $4.8 million decrease in regulatory funding related to CAF II; that resulted from recognizing three quarters of catch-up transitional funding in Q3, following our acceptance of CAF II in August versus only one quarter’s worth of transitional funding in Q4.

Second, we experienced a typical seasonal decline in revenue, as our seasonal suspend program is most active coming out of Q3 and into Q4. Finally, our revenue results in the quarter reflect the continuation of declining trends in our legacy and convertible products. Looking at our strategic revenue categories, growth revenue comprised 29.7% of our total revenue, which is up from 27.3% in Q4 of 2014. Within growth products, hosted and advanced services revenue increased slightly for the quarter. In addition, Ethernet revenue was flat as higher circuit counts were offset by ARPU pressure.

As anticipated, Ethernet service, when not combined with advanced services, is becoming further commoditized, which is pressuring prices but we continue to be successful in re-terming enterprise customers to long-term contracts. Finally, broadband revenue declined due to seasonal disconnects as well as the lower subscriber count. Over the past several quarters, we implemented more stringent credit screening for new subscribers and when combined with our efforts to improve customer service, has led to encouraging signs with our gross churn. We continue to expect our broadband subscriber count to stabilize and to grow in 2016 as we increase available speeds, make progress on our CAF II build-outs, enhance marketing programs and deliver excellent customer service.

We continue to manage expenses well. On a sequential basis, operating expenses, excluding depreciation and amortization decreased $1.9 million to $90.9 million. On an adjusted basis which excludes items such as pension, OPEB and severance expense, adjusted operating expenses decreased $8.9 million quarter-over-quarter, primarily from lower employee expenses. The benefits of a mild winter and a lower trouble load, which led to lower overtime, the full expense impact from the headcount reduction completed in July and the lower bonus accrual versus Q3 were the primary drivers of lower employee expense. These items were somewhat offset by higher property taxes versus last quarter as we booked a tax settlement in Q3.

Employee headcount declined by 334 year-over-year, with the bulk of the reduction happening in July 2015. We expect several of the expense-savings initiatives carried out in 2015 to provide additional benefits as their impact wraps into 2016. Adjusted EBITDA was $63.9 million in the quarter, a $2.8 million decrease when compared to Q3. The decrease was driven by lower revenue, substantially offset by lower adjusted operating expenses. Adjusted EBITDA margin of 30.4% was up 240 basis points from Q4 of 2014 after excluding the one-time non-operating impact of the litigation trust settlement booked in Q4 of 2014.

Q4 CapEx of $33.2 million increased from $28.2 million in Q3 and was slightly higher than our guidance. Our Q4 CapEx included some accelerated spending related to CAF II. For the quarter, unlevered free cash flow of $23.3 million resulted from adjusted EBITDA of $63.9 million less CapEx of $33.2 million and $7.3 million of cash pension contributions and cash OPEB payments. Unlevered free cash flow declined $9.8 million from Q3 driven by lower adjusted EBITDA, higher CapEx and higher cash pension and cash OPEB payments.

We generated $42.3 million of net income in the quarter versus net income of $53.1 million in Q3. We continue to recognize a reduction in operating expense related to the GAAP treatment of the change in the liability of the OPEB plan, due to the elimination of post-employment health benefits for active employees.

As I mentioned on our Q3 call, the amortization period for the OPEB benefit is based on the two and a half year term of the transition medical premium reimbursement arrangement agreed to in the new CBA. And we expect a continuing impact of the OPEB benefit amortization through Q4 of 2016.

In addition, while this GAAP treatment impacts net income in 2015 and 2016 for book purposes, this book recognition does not increase our income taxes or change our accumulated federal net operating loss carry forwards which were $274 million at the end of Q4.

Now to guidance, for the full year 2016, we expect to generate $105 million to $120 million in unlevered free cash flow. In addition adjusted EBITDA is expected to be between $245 million and $255 million. CapEx is expected to be between $115 million and $120 million and cash used for pension contributions and OPEB on a combined basis of approximately $20 million is expected.

In general we expect expense savings from both new efficiency initiatives and the wrapping benefits of actions already taken to offset declining revenue. For the year, we expect scheduled annual principal payments of $6.4 million and cash interest expense of approximately $78 million. Our cash balance at the end of Q4 was $26.6 million as compared to $17 million at the end of Q3. Our $75 million revolver remained undrawn as of December 31 with $14.2 million committed for letters of credit.

So, before I turn it over for Q&A, let me reiterate some key themes. We have capitalized on opportunities, overcome obstacles, and managed expenses well in order to deliver a very strong year. We delivered strong EBITDA as diligent and effective cost management, offset the decline in revenue, a revenue decline that was, in part, impacted by the strike. And reflecting the cash generated in our underlying business, we ended the year in a strong cash position despite the incremental cash burn related to the execution of our strike contingency plans.

As we look to 2016 we are going to benefit from the full-year impact of last year’s cost cuts and continued cost control efforts across the Company. While focused on cost, we are also transforming revenue and expect to slow down the rate of revenue erosion. We feel confident in our ability to deliver our guidance and generate free cash flow.

So with that, let me ask the operator to open the call up for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] and your first question comes from the line of Mike McCormack of Jefferies. Please proceed.

Scott Goldman

Hi, guys. It’s Scott actually on for Mike, who is traveling. I guess I just wanted to focus on the broadband side, some interesting commentary on the call today. One, you mentioned expectations for the ability to grow subs there. Maybe give a little bit of sense for what we’ve seen thus far. We are already two months into the year, whether we are tracking to plan there. And then along those lines, can you just refresh us where you are in terms of speed availability and where you think you can get to on the 1 Gigabit per second side. I know it’s just, I think one market that you guys have announced.

And then secondly, maybe just on the convertible revenue stream that you guys have talked about, maybe you can just talk a little bit about how much the decline that you guys see there, you are actually winning inside of other buckets inside of the growth categorization and whether or not the pacing of that conversion to newer products has stayed the same or is accelerating or how that looks versus last year? Thanks.

Paul Sunu

Yes it’s Paul here. Lot of questions there. So in terms of first addressing broadband, as we look at broadband subscriber growth, the way we think about it is really optimizing the inflows and the outflows. So optimization is really based on, as we think about it, three main buckets: one is the state of the network, improving quality of service and understanding the demographics that we are dealing with. We really have a fiber-rich network and we have been able to leverage that network to deliver the high bandwidth that businesses are looking for and on the residential side, we’ve got like 1.3 million loops that qualify to deliver over 7 megs [ph] and over 800,000 of that, that can do over 15 megs [ph]. And we have only got, like, 100,000 subscribers at that level.

So I think that there is a lot of room for people to upgrade to the higher speeds. As we have also done some analysis, we see about half of our market opportunity for broadband growth to be in areas that have fairly low competition. And when we do marketing in those areas, we find that the subscribers there tend to be staying with us longer. So as we think about it with exceptional and excellent customer service we expect to change perceptions and we think that, that’s going to have impact on this over time.

The key here for us is, I think one of the things that we have been able to demonstrate to the market is we look to do – a subset of changes. We want to make real meaningful changes to our operations that’s going to have impact over time. Nothing that is cosmetic or superficial in nature. And so we’re not looking to increase subscriber for subscriber number sake. We want to make sure that these things stay with us and so a part of what we’re doing is raising the credit quality of our customers and looking to make sure that we’re not bringing people on that are chasing the next introductory offer.

One of the things that I just kind of talked about is that we do offer high bandwidth availability in our regions. And what we’re finding is that people are yet still to take those things and maybe cost driven and maybe market driven or marketing driven, awareness driven, we are going to do a better job in making awareness happen. So just in terms of 1 Gigabit availability, we think that, that is a nice mark to be able to do, but I am not exactly sure that from a residential point of view, that 1 Gigabit is a necessary component of increasing subscriber growth.

And then addressing your convertible, one of the things that we’ve always talked about is this convertible segment that we have identified are high-capacity circuits that are on our TDM network, ATM and Frame and that is pretty profitable business for us. We know that over time, that, that segment is going to convert to Ethernet which is more efficient for us to manage but certainly more cost-effective for our customers.

The thing here is we want to make sure that we stay close to our customers so that we know when it is that they are ready to move, so when they are ready to move we can provide the circuits they are looking for. It’s really hard for us to be able to time this because it is lumpy; it’s based upon customer decisions of when it is that they are ready to make that move. And in some quarters, we are going to see greater erosion in the converts and we’re not going to see the offsetting make-up on the growth side because the – whenever people convert from the traditional TDM to an Ethernet-type of a circuit, they are doing this at lower pricing.

So there is revenue churn that happens for us and one of the things that we need to do with our sales force is to be able to cover that revenue churn through additional sales to the existing customers or bring on new logos. I think we do that fairly well. It’s just the fact that there are quarters where we see some of this lumpiness happening. And so overall, we believe that we will be able to cover that. It just was not something that we were able to cover this past quarter.

Scott Goldman

Maybe just a quick follow-up. Maybe it’s just a definitional thing, but the conversion that you’re seeing there, are you finding that companies that are converting from ATM and Frame Relay to Ethernet are staying with Fairpoint? Are you winning your fair share of those conversions or how does that trend look?

Paul Sun

Absolutely. We have the premier network in northern New England. So for us to be able to provision the type of circuits, Ethernet circuits on fiber or – if we have to over a copper which we would only do if there was such that it was capital efficient for us. It’s just – we’re winning them. So that’s really not the – it’s really not the concern as much as trying to make sure that we have enough of a pipeline to cover the revenue churn that is just inherent when people convert from TDM to Ethernet.

Scott Goldman

It makes sense. Thanks a lot, Paul.

Operator

And your next question comes from the line of Barry Sine of Drexel. Please go ahead.

Barry Sine

Good morning, folks. I want to continue the conversation on returning to broadband subscriber growth and Paul you mentioned optimizing both the inflow and the outflow. Could you talk about where your pricing is and what your offer looks like and how that compares to competitors? You talked about some areas where you have less competition but I’m assuming that maybe your line losses are in areas in the southern tier of your New England footprint where you have more footprint. So what does your offer look like vis-à-vis the competition?

Paul Sunu

We’ve operated in and we have experience operating basically in duopolies for a long time. Cable is a formidable competitor. Look, they offer a nice package and a bundle and they – in certain areas, they certainly have a speed advantage. So we recognize that and so our marketing team does a really good job of making sure that our packages are competitive and we can counter punch on a both aggregate and deconstructive pricing. So to the extent that you find cable offers that are geared just on broadband or doing a package, we try to bundle these things in a way that we can stay competitive.

Our aim is not to be a low cost, per se. What we want to do is to make sure that people stay with us because we can provide a better service and a better experience and that’s really what we aim to do. And as a result, we think that we will be able to change the perception that people have of Fairpoint and our brand and be able to keep our customers with us longer.

Barry Sine

Okay. Next area I wanted to ask about, if you don’t mind, you talked about cutting over the telecom properties to the operation systems and billing systems that you’re using in northern New England. And any time I hear a telecom company talking about doing systems conversions, I always get concerned that there may be challenges and the cut over, in your history, I think there have been some challenges. I know there have been some challenges.

So can you talk about that conversion and give us any sense of how that’s going to go and that you’re not going to run into some of the same problems we’ve seen in the industry?

Paul Sunu

Well, look, I have personal battle scars related to these types of conversions. I think that you’ve got to appreciate that when we’re here talking about that this is on our plans, we are doing this with eyes wide open as well as full confidence that this can get done. Last year, in 2015, we did three major upgrades on our system right after we came through the strike. So and there – we didn’t miss a beat.

This is the type of confidence that gets built and the assurances that get given by our technology organization to the company. This is not something that gets done where it is a top-down type of a thing. You measure the temperament of the organization and see whether or not the confidence exists to be able to make this happen. I believe that where we are at today is something that we can do, that's – we are doing this on a very methodical basis. We're going to start, as I said, with our accounting and HR systems.

We expect to work on that this year. We certainly won't be doing these cut overs in an area where our controllers' organization is going to go a lot of crazy sayings thatwe can't do it at this particular point in time. But this is something that we believe is a natural for companies. It is part of the integration process; it's part of operating a company with excellence. It's just something that needs to get done. I think that we are a high-functioning company that can – that has the ability to do it.

Barry Sine

Okay. That is very helpful. Thank you Paul. My last question is I'm wondering if you could give us a little more visibility on the CAF II builds. You guys have provided CapEx guidance for 2016. Just trying to get a better sense so I can understand what the broadband addressable market looks like and figure what that might mean in terms of broadband subscriber growth?

Paul Sunu

We're – as I said in my introductory comments, we're making good progress and we are really confident that we have the wherewithal to complete the CAF II builds on time and on budget. A lot of this, I think, we – I've been talking about this for some time which is that I think we have one of the best complex project management teams that I have ever seen and that gives you a lot of confidence.

This is a large build for us. It is a 105,000 locations in 14 different states. But with the project management team that we have, the engineering organization and the work that they are doing, the confidence that we now have in our operations team, we believe that giving you some visibility in the near-term, we have a 14% completion mark milestone that the FCC has mandated by the end of 2017, we think we'll easily meet and beat that type of mark. And so we're going to be doing that within the CapEx guidance that we've been able to provide so we feel pretty good about this. The – and as these things come online, we'll make sure that we seamlessly integrate that process and hand it off to our marketing organizations and our call centers to make sure that we're getting the penetration that we are looking for.

Barry Sine

Okay. Those are my questions. Thank you, Paul.

Operator

Thank you. And your next question comes from the line of Jen Ganzi of NewMark Capital. Please proceed.

Jen Ganzi

Hi. Thanks so much for taking the question. Just going back to the broadband question, I think you mentioned that you were providing more stringent credit checks and things like that. Can you give us a sense of like had you not sort of undertaken that measure, what growth may have looked like or declines may have looked like for that space? And can we expect to continued growth throughout 2016, sort of a like-for-like basis, now that – as those sort of that new credit check system so that it gets grandfathered?

Paul Sunu

Ajay, do you want to take this?

Ajay Sabherwal

Jen, this is Ajay Sabherwal. Yes, we could have shown growth if we had not lowered – not raised the standards for the thresholds for credit checks, and we had not been aggressive in disconnecting folks who don't pay their bills. Those numbers would have waned out in that manner. However, that’s not what we're going to do because you can just boost revenue and not get the cash and the EBITDA. So that's just not going to happen. And on a like-for-like basis, now we do expect growth.

Jen Ganzi

Okay, got you. And then just, in general, just sort of looking at the business as a whole, when do you guys – I don't know if you have sort of this visibility but it looks like in your guidance, on the high end, you would be sort of flat on EBITDA year-over-year. I'm just wondering when do you expect sort of EBITDA and/or revenue to kind of have – having the growth businesses starting to meet or outpace the legacy and convertible businesses such that revenue stops declining and EBITDA starts to grow? Do you – can you kind of give us a sense timing of that?

Paul Sunu

Ajay, do you want to take the revenue fees?

Ajay Sabherwal

We have said it very clearly. We want to slow down the pace of revenue erosion while delivering very strong EBITDA, yes, you have categorized it correctly; it is flat, relatively flat, strong unlevered free cash flow and very good free cash flow. That – those are not mutually exclusive objectives. So that's the mission. We've also said transformation before stabilization before growth. If you get more of the growth segment versus the convertible and legacy, as that approaches 40% to 50%, then you’re going to get closer towards stabilization and once you get closer to stabilization, then you're going to get growth. We have not given a timeframe for it, but clearly, that is the path we're on.

Jen Ganzi

Okay, got you. So I guess you can't say whether it's like the next – a year or two, whatever. You're not really – you don't, at this point, you don't feel comfortable like giving some sort of – just sort of broad – just sort of view on like when you expect all that to kind of occur?

Paul Sunu

I think we've – the way we think about this. Well, one we don't get specific revenue guidance so other than what Ajay has kind of talked about in terms of our overall expectations, shrinking the decline year-over-year, but we've also kind of talked about that we have an objective to get over 40% of our revenues to be growth by 2019. I think that, that growth segment growing to those types of levels will provide that type of – the compounding effect that is positive in nature. It's – so that's part of the reason that we're so focused on making sure that our growth revenues continues to increase and we expect that segment to increase in 2016 over 2015.

Jen Ganzi

Okay, got you. Thanks. That is all for me. Thanks guys.

Paul Sunu

Okay.

Operator

And your next question comes from the line of Stephen Asabod of McMahon Capital. Please proceed.

Stephen Asabod

Hi guys. Congratulations on a good year and a very solid quarter. A couple of questions regarding the company's capital allocation on its balance sheet. How does the company think about its current debt and equity and given the company is going to be generating some free cash flow this year, how does the company plan to go in and use that excess free cash flow?

And is there an intention to go ahead and perhaps you pay some debt and maybe buyback some equity? And then on the – and then just one of other follow-up question regarding on the M&A front. The ILEC space has been pretty strong for the past couple of weeks, earnings for many of the other ILECs have been very strong. Spreads on the high yield front have been coming in pretty hard. How does that – given your statement in your press release given financing terms are being more attractive, what should we be looking for vis-a-vis kind of high yield spreads in this space?

Paul Sunu

Okay. So first of all, thank you, Steve for your comments here about the year. We do think that we had a really good year. The – I think when we – first, let's talk about the credit market. We generally though we are in a period where the credit markets really are not favorable and the telecom sector has been impacted a little more than other sectors. We are really actively monitoring the market and looking to be opportunistic and seeing whether or not this credit market headwind is temporary or permanent in nature. So we will see how that goes. We have talked about this for some time that we have looked at the spectrum of alternatives but a lot of what you look at here is dependent upon the credit markets. At this particular point in time, it is a bit out of favor.

One of the things that I think is important to note is that for those that are on this call and those that follow our story, you certainly know the progress that we have made in the platform that we have built. But one of the things that we've discovered, as we've had discussions with others, our peers, bankers, it is clear that the world did not know what we have achieved in the past five years. The improvements that we made in our operations, the changes in the regulatory environment, they still believe that the regulatory environment that we're in is very punitive. It's not the case; the transformation in our revenue and our sales culture, the labor agreements and the enhancements that, that brings.

And as result of these discussions, there's clear acknowledgment now of the progress that we've made and really, the outstanding platform that we have been able to develop and create. So I think that all of that really will serve us well as we continue to look for opportunities in terms of the alternatives that we're looking for. Whether it be an active participant in this consolidating industry or we're going to take a look at how the refinancing works, the work that we have done and the acknowledgment that we're now getting is, I think is a big factor than all of this. So we – so at this particular point, we are actively monitoring the market and seeing what might happen.

Stephen Asabod

That's fair. And then on the balance sheet front vis-a-vis debt refinement or perhaps some buybacks?

Paul Sunu

Well, you know I still….

Stephen Asabod

Thinking about that.

Paul Sunu

Based on the numbers that we've provided, we could generate free cash flow between $20 million to $35 million this year. We are going to make sure that we put our money in the way that will be shareholder enhancing and we'll continue to look at that.

Stephen Asabod

Okay. Fair enough. Thank you so much and looking forward to some positive news in the coming months. Thank you.

Paul Sunu

Thank you, Steve.

Operator

Thank you. We have no questions at this time. [Operator Instructions] Okay. So we have no more questions. And I would now like to turn the call over to Paul Taaffe for closing remarks.

Paul Taaffe

Thank you, Sheila. Thank you again for your interest in FairPoint. We look forward to speaking with you in May when we report our first quarter results. Have a great day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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