Good morning, and welcome back to Citi's 2023 Communications, Media, and Entertainment Conference. I'm Anthony Nemoto, I cover the communication services and infrastructure categories for Citi Research with Mike Rollins. Before we get started, I'd like to mention that we have disclosures available at the registration desks up front and also under the Citi Analyst disclosures link if you're viewing this on webcast via Citi Velocity. We also have mics around the room if you wanna ask a question. If you push the button, the light will go on. We'll try to get you involved in the conversation. If you're on Citi Velocity, there's a questions box that you can type your questions into. With that, I'm very pleased to have Scott Beasley, EVP and CFO of Frontier Communications Parent here today. Scott, thank you for being here, Happy New Year. Good morning, Anthony. Thanks for having us. It's a great conference. We always enjoy coming. Great. Now, I know you guys pre-released some results this morning. We'll definitely be looking to unpack that during our discussion. To kick it off, you know, given it's a new year, we wanna start off by asking what is Frontier's strategic and operating priorities for the coming year, and are there any notable changes from the objectives that you established this time last year? Thanks, Anthony. Our strategy for 2023 is exactly the same as it was in 2021 and 2022. There are four tenets to our strategy: build fiber, sell fiber, improve the customer experience, and reduce our cost structure. I think we made significant progress on all four in the last 18 months, and we'll unpack some of those, including today's announcement about another record quarter of net adds. The strategy remains the same, that we wanna build, sell fiber, and continue to accelerate as much as possible. Great. Just starting with the building of the fiber. you know, you're halfway towards the 10 million fiber passings target for 2025, accelerated the build all throughout last year. you know, what is your peak level of pacing, you think, for fiber upgrades? Is it the 1.6-1.7 you've laid out for the next couple of years annually? What are the hurdles to going even faster? Taking a step back on building fiber, I'd say we built significantly faster than our original target of 1 million. I think we were the only large player in the industry to exceed our initial target and then raise it. We raised it to 1.1 million to 1.2 million in the middle of the year and had a lot of success there. That sets us up well for 2023 and beyond, in that we're ahead of plan now. As we move forward, we're going to continue to build as fast as possible while also balancing efficiency in the supply chain, efficiency throughout the labor markets, and then how we sell and install our new customers. 2022, I think, is a testament to the quality of the team in that it was a challenging year externally. You had labor, record low unemployment that made labor a challenge. You had supply chain challenges. You had kind of permitting challenges as governments across the country got used to this new volume of permitting requests. Even with those challenges, we raised our target significantly and then, did more than we expected to. I think we're set up well for 2023, and we'll continue to build as fast as we can. Great. You know, AT&T obviously announced a JV to go kinda out of footprint with their fiber builds, you know, for the holidays. Firstly, is this a structure that you might also consider? Secondly, you know, the 7 million locations through you know, waves 1 and 2 that you initially set out to upgrade, has that set of locations changed at all as different flags have been planted potentially from, you know, out of footprint overbuilders? Do you employ any strategies around planting your flags dynamically as this happens? Yeah, sure. Let me answer the second part of that first, and I'll go back to your first question. The high level answer is not much of our build plan has changed since the original 10 million target that we laid out in August 2021. Yes, there are some tweaks around the edges of where we're gonna build based on when we do more detailed engineering or if the competitive landscape changes a bit. When we look back and said, where do we think we're gonna build, which 10 million did we think we're gonna build in 2021? That's a very similar number now. We have the advantage of getting off to a very fast start that was really unique in the industry, and therefore, we haven't seen a lot of overbuilders come into our footprint. We've been able to build, and sell at the rates that we expected to, and actually in penetration, which I know we'll get to, we're at or above the targets, that we set out at Investor Day, which shows that the competitive landscape is right in line with what we expected, and therefore, we're not having to change our build plan, really much at all. Got it. Turning to the penetration and the selling of the fiber, you know, the 4Q announced another, you know, solid quarter of fiber results. Can you talk about the puts and takes of what drove the results there, obviously on the fiber side, but then, you know, the copper losses remained a bit elevated as well. Yeah, sure. 75,000's a great number, a great achievement from our sales and our operations team. It's the sixth quarter in a row of record fiber net adds, and it was done in a challenging quarter weather-wise, where you had a number of challenges throughout the quarter in terms of a record winter storm in the last two weeks of the year that we were able to push through. Big credit to our entire Frontier team for hitting another record. If we go into what was one level beneath that, it was very similar to previous quarters, where we had growth in both our base markets and our expansion markets. We had success against every competitor in every geography. Finally, the vast majority of the customers came from new to Frontier customers. A portion of them were what we call copper-to-fiber migrations, where we're migrating our legacy DSL customers to fiber. The vast majority were coming from either new movers into our footprint or competitive wins against cable. That broad base of support really gives us confidence moving into 2023, that we'll continue to meet or exceed our overall penetration targets, which to remind everybody, we expect to be 15%-20% penetrated at 12 months, 25%-30% penetrated at 24 months, and then grow to a terminal penetration of 45%. We're fully on track and exceeding that in a lot of areas. Got it. you know, 3Q, you're mentioning maybe some tailwinds from snowbirds. should we expect that kind of impact to become more muted, though, over time, given, you know, the footprint expansion? I think you're right, Anthony. Florida is an outsized part of our footprint now, but as we grow our fiber footprint, we've said we'll be building in 16 states by the middle part of this year. Florida which is the main beneficiary of snowbirds, that becomes a smaller and smaller% of our overall footprint. Over time, that snowbird effect likely becomes muted. Got it. You were just mentioning, you know, the penetration targets by cohort. You know, the 21 cohort was right in the range. Anything you can share about the 4Q 21? Was that also right in the range as well? That's right. We've been at or above our target range for each of the cohorts. That was true for 2020. 2021 is a little bit unique in that the current team wasn't here for the first half of the year. We had to make up a bit of that performance as we got in and restructured our pricing plan and restructured our go-to market plan. We've made a lot of progress in that 2021 cohort, and it's back in line with where we expect. The 2022 cohort, based on the record net adds that I've described, is right on track to hit our penetration rates. You know, you never wanna draw too many conclusions from a single quarter or of a single cohort because there are all sorts of differences. When you take a step back, we're really proud that each of our cohorts individually has been at or above the targets that we set. As you look out to, you know, 2023, 2024, 2025, and then the next, you know, successive sets of cohorts that come in, is your expectation that those, you know, penetration curves are gonna look similar, like just kinda tracking in those envelopes? Should they be, you know, trending a bit lower 'cause they're, you know, harder, passings, if you will, in terms of densities? Yeah, I think you're right that they'll stay within the target envelope, and some of them may be on the lower end, some may be in the higher end. Our goal is obviously to exceed the high end. I'd say there's two dynamics. Each cohort is a bit different. When you're building in different densities with different brand recognition of Frontier, that may make things slightly more challenging. However, we're getting better at penetrating. We under John Harrobin, our head of Consumer, he's really fine-tuned the playbook that we've had in the last 18 months. We've gotten better at going to market through different channels. Our digital capabilities have improved significantly, and we'll continue to make progress there. We're improving, and that should help offset any specific challenges in a market as we go into it. Got it. You mentioned your base fiber network as well, you know, kind of getting back to historical levels. What are the specific actions that you're taking to, you know, get those back? They are working, so. They are. If, if you look at our base fiber penetration, we've improved from about almost 200 basis points, so close to 41%, up to a little above 43%. Again, I said in Q4 we improved the penetration even further. Our base fiber penetration playbook is working. As we've said many times before, it's not a single silver bullet. It's a combination of dozens or hundreds of improvement items, and I'll walk through a few of those categories. The first was simplifying our pricing plans. When we came in, a year and a half ago, we had way too many price points. It was confusing to customers, we simplified that down to just three plans. We have a 500 Meg, a 1 Gig, and a 2 Gig offer. We simplified that. We've made a lot of improvements in our customer experience. For example, our bills, we've completely redesigned our bills. We've made it easier for customers to understand. We've improved our ability for customers to communicate with us digitally. We launched a completely new app in Q4 that should help improve that digital interaction with customers. We frequently say, no customer wants to wake up in the morning and say, "I'm gonna call my internet provider." They wanna do things digitally. They wanna chat with us on the app or on the web. We've increasingly improved our customer experience there. The final thing, particularly in the base markets, this is relevant, we recognized we had a damaged brand, and so we refreshed the brand in the early part of 2022. Importantly, we decided we didn't need to change the name, that the name still had value. It was all of the underlying actions that had damaged the brand that we needed to change. We frequently talk about, we have a executive team meeting for two hours every single Friday, where we review hundreds of customer complaints. We get into the nuts and bolts of what drives customer dissatisfaction, we fix those one by one. I think the most telling statistic on the success there is that we've improved our NPS by about 30 points in fiber. Just The last 15 months, a 30 point NPS improvement, which shows that the specific tactical changes that we're making are working. Right. Yeah, in terms of your competitors, Cable or, you know, they're not standing still. Their network investment strategy are now, you know, kind of well communicated. You know, Altice, of course, have fiber, Charter and Comcast heading towards DOCSIS 4.0. MVNO products by them are also taking, you know, their share of gross adds on the wireless side. What are you seeing in terms of, you know, your footprint in terms of Cable competition and effectiveness of their converged bundles? Yeah, I'd say we haven't seen much of an impact of their converged offerings. You know, the best data point I can point to is the record net adds that we keep putting out quarter after quarter. We've said, you know, this kind of leads into an MVNO question I'm sure you'll ask next, but, you know, what would the reasons be to do an MVNO? It would either be because we're unable to grow without it, or that it would reduce churn significantly. Both of those have not yet been true in our footprint. We've been able to grow without a wireless bundle, and we have not really seen an increase in churn, and nor have we seen our competitors be able to decrease their churn with a wireless bundle. We think that customers right now are choosing to buy their internet separately from their wireless. If that changes, we've always said we could pivot quickly. We have a team with deep experience in the wireless business, in negotiating MVNOs, so we could change quickly, but we haven't seen the data to suggest that that's required right now. Got it. Yeah, you've mentioned, you know, the management competencies and backgrounds and being able to stand one up quickly. Like, how quickly could you know, stand one up? Has there been any, like, preparatory work done to date? We're obviously exploring strategic alternatives all the time. We have a team, Vishal Dixit, our head of strategy, that came over from Vodafone. He's done this dozens of times before. We're well positioned if we needed to make that change. Again, right now, we haven't seen the proof points that would require us to pivot and do an MVNO. Got it. Can you update us on the impact that, you know, fixed wireless has had on your footprint? I know you mentioned maybe, you know, around the edges in your copper territories, but Verizon and T-Mobile, you know, continue to have success there. In the markets where they have had success, are you still seeing a path to that 45% penetration? Yeah, let me take the first part. Let me break it out into fiber and copper. In fiber, we've seen very little impact from fixed wireless, and I think that supports our underlying thesis that fiber is a far superior technical product versus fixed wireless. If you look at data usage trends for our fiber customers, they're far in excess of what wireless networks are able to absorb through a fixed wireless product. We haven't seen fixed wireless really impact our fiber penetration or gross add numbers at all, and therefore, we don't expect any change to our eventual expectation of 45% terminal penetration. That's the fiber side. On copper, again, we haven't seen a significant impact from fixed wireless. We've characterized it as kind of nibbling around the edges, that we haven't seen a huge impact on our churn from fixed wireless. Perhaps as movers move into our footprint and they're choosing, do they choose a DSL, copper option from us or fixed wireless, perhaps they're choosing a fixed wireless and in a higher proportion than they used to. Again, our copper subscriber growth is kind of in the range that we expected even before fixed wireless grew significantly. I wouldn't call it a material impact on our copper footprint. Got it. Turning to pricing, you know, you've talked about the target of 3%-4% ARPU growth year-over-year, combo of modest price increases and the higher, you know, Gig tier mix, in your sub-base. Can you talk about any ARPU headwinds that we should expect for 2023? I know you should be, you know, lapping auto-pay, but in the gift card side, I think you talked about being more surgical. Wondering if you could elaborate on that? Yeah. I think, you know, it's part of the theme of 2021 and 2022, which is we were piloting a lot of different items to see what worked and what was required to win new customers in certain geographies. We introduced promotional gift cards in the middle part of 2021, and then we've experimented with different values depending on the competitive landscape and depending on, you know, things like NPS and how much do we need to rebuild our brand in certain geographies. We now have 18 months of data to say, what do we need to do to win back customers' trust or win new customers? We will be again, much more surgical in 2023, in to be efficient with our gift cards, but also allow us to win new customers at the rates that we need to win. I think you're right. Going back to the first part of your question, we do expect 3%-4% year-over-year ARPU growth at the end of 2023 versus where we'll end up in 2022. Part of that is a lessening headwind from auto-pay and gift cards. They'll still be a headwind, but less of an impact because we've now had them for about 18 months. Then we'll have kind of 3 structural changes to help long-term ARPU growth. One is base speed upgrades. Our base is significantly lower in its Gig mix than our new customers. Our new customers are taking Gig-plus mix at 45%-50%. Our base is in the 15% range. We're getting better at communicating with customers, current customers, what are the advantages of fiber, what are the advantages of Gig plus, and targeting customers for base speed upgrades. We'll also see kind of normal base price increases just to reflect passing on higher input costs. Finally, we talked about the more surgical use of gift cards. On the, you know, the uptiering part of that, I mean, if, you know, we were to enter a recession this year, I mean, do you frame the 3%-4% ARPU growth as optimistic in that scenario, or is that factored in, and are you seeing any, you know, maybe downshifting of tiers maybe happening? We have not seen any downshifting of tiers. I think it's something we watch closely as we think about are we heading into a macro recession and how might our customers react, but we haven't seen that yet. I think that speaks to, number one, the criticality of fiber in particular to people's home lives, whether they work from home, school from home, all the video conferencing needs. Home internet is not something that you can turn off, and it's not something that you can switch to mobile only like you might have in previous recessions. Number two, the bandwidth that they're buying is what they need. We've seen a lot of studies that say the home internet bill is probably the second or third highest priority for consumers to pay, and that's reflected in what we see. We don't see people downshifting. We don't see people being slower to pay their bills. In fact, our collection metrics at the end of Q3 were as healthy as they were healthier than they were the year before. We're watching the health of the consumer closely, but we haven't seen any negative impacts yet. Then on the business side, sticking with, you know, kind of the recession theme, are you seeing any, like, elongation in the sales cycles or any risks there? We have not. Our business, collection trends are just as healthy as our consumer trends. We've seen customers continue to make decisions at about the same pace that they were before. You know, we're different than the overall market when you talk about our business market, both our SMB and our enterprise. We're such a small part of the overall market, and we have been under-penetrated for so long that what you might see at the market level won't necessarily be reflected in our own business. We've hired new leaders there. We're scaling up our sales force significantly there. We're confident that even in a downside, you know, recessionary scenario, our customers will continue to act like they are and we will reach a stable business and wholesale revenue in 2023 versus 2022, which would be a significant milestone. Right. Sticking with business, on the mid-market side, I know that was an area you wanted to, you know, grow your focus on, compared to the old Frontier, more focused on, you know, multinational globals. Where is the progress, you know, with that transition? And has that shift required significant investment in your go-to-market and just overall strategy? Yeah. One of the first things Nick did when he came in, about 18 months ago, or almost two years ago, was pivot away from the large enterprise customers where we didn't really have the right to win, and we didn't have the product set to win towards a much, the smaller and medium-sized customer base. Frontier had traditionally aimed its enterprise efforts at that large customer base and were unsuccessful. We have gone through a similar transformation in our enterprise go-to-market as we did in our consumer strategy, where we launched a new product set, we've revamped our sales force, we've changed our organizational structure, and we're starting to see the fruits of that there early, in that the enterprise business was probably the last of our businesses that we kind of focused on to transform, but we are seeing the early signs of success there in terms of order volume. On the SMB side, you know, key factors to your success there, are you, are you primarily, you know, taking share from, say, cable, in those results? Yes. Most of our growth there has been much more competitive against our, our cable competition. Let me take a step back there. In SMB customers typically buy very similar to consumer customers. We had about half the penetration rates in SMB than we thought the terminal penetration should be. We were in the 20s versus the mid-40s. Again, the primary reason was just a lack of focus on SMB. Nick frequently talks about how when he joined, there was 1 person doing SMB, a single person across a customer base of, you know, in the, you know, hundreds of thousands. We built an SMB team. We revamped our pricing structure there, very similar to our consumer pricing structure, where we simplified the tiers. We've added a number of value-added services like RingCentral, and we're finally returning to positive fiber net add growth in our SMB business, and that's been a nice tailwind for us overall. Just to close out, business on the wholesale side, you know, you redid the AT&T deal. Any other notable progress to point out in, you know, leveraging the network there and the proximity to the towers? We've said fiber to the tower is a big growth area for us, and AT&T is obviously one of the wireless carriers. We're going through similar kind of strategic rebuilds with all of the carriers. We would expect as we essentially double our footprint of fiber, that you'd almost double the amount of towers that you're passing nearby with fiber. We would expect to be able to grow the fiber to the tower business significantly with the investment in fiber plus the rebuilt strategic relationships. Got it. Just, you know, churn. Can you update us on what you're seeing in terms of voluntary versus involuntary churn across the copper and fiber sub-basis? Yeah, we... Let me start with fiber. Fiber churn continued to be very healthy. We didn't publish the number, but, right in line with our expectations at a healthy rate in Q4. Also positively for Q4, copper churn came back down from Q3 levels. There's some seasonality to that, but also it shows that our efforts in improving the customer experience, are working in reducing copper churn. Both fiber and copper churn were at healthy levels for us in Q4. Turning to the Wave 3 footprint, you know, any notable developments on the, on the $1 million-$2 million they called out that you could attractively build out? Is the IRR range still expected to be like in the mid-teens for that set? That's right. The additional 1 million to 2 million homes has a similar IRR to the original 10 million. If you, if you take a step back, we said our initial target was 10 million. We said, actually, as we dug deeper into the entire footprint, there's probably an additional 1 million to 2 million that look similar to that initial 10 million with mid-to-high teens IRRs. On the balance of the 3 million-4 million, any updates there? I know you guys have also mentioned that you secured like, I think, over $440 million, I believe, of grant funding to date. Is that funding potentially to be applied to those 3 million-4 million? Is that the way to think about it or? A portion of the 440 was RDOF, and then we've won, I think it's about $80 million-$100 million since RDOF, that was either ARPA money or some other state and municipal funding. Most of that is incorporated in the 10 million total locations, but some of it may be incremental. As we win additional funding, it should open up additional locations that we can build with private capital alone. For example, if you're getting subsidized to build to, say, 1,000 rural homes in a certain area, you may pass 500 or 1,000 that you weren't anticipating building, but because you're getting subsidized on that further part, it now makes sense for us to build that nearer part. The update on government subsidies, the FCC maps came out in November. We're actively reviewing those. There is expected to be a challenge process that lasts a period of time. I heard a panel recently that said, you know, likely funding gets allocated to the states maybe late 2023 and then from the states to companies in 2024. I think that's a reasonable assumption. We're actively pursuing grant funding. We're actively participating in the challenge process to make sure that the maps are accurate. We'll have updates on that as we move forward. Got it. You touched a little bit on the partnerships earlier. You know, I know for fiber builds, you have a preference you've set for going it, you know, your own. You know, there's a number of partnerships spanning other areas of the business. RingCentral you mentioned, YouTube TV, eero. What, what's the framework you use to determine when you leverage these strategic partnerships? I think, our core connectivity service is always gonna be at the heart of our offer. We wanna concentrate on selling customers the best broadband possible. In a lot of ways, the debundling of content from connectivity is working in our favor because previously, somebody made their content decision at the same time they made their connectivity decision, and that's decreasing over time. Most of our new customers are making those decisions separately. We've said we wanna make it as easy as possible for people if they want to buy content at the same time. We have partnerships with Apple TV, YouTube TV, DirecTV Stream. We wanna make it easy for customers to solve pain points like Wi-Fi in the house. We have a partnership with eero, which is the best Wi-Fi experience you can get. On the business side, we have a partnership with RingCentral. We wanna really focus on connectivity, but then make it easy for customers to bundle other value-added services. Turning to, you know, the cost savings, you know, you raised it, the target from $250 million by 2023 to $400 million by 2024. How much of the $250 million could you share, you know, ended up being reinvested versus, you know, falling to the bottom line? On the incremental $150 million, should we think about more of that falling to the bottom line? It's still too early to give our financials for Q4, but one way to think about it, if you look at the full year of 2022, we had about a $50 million unexpected headwind from higher energy costs, combination of electricity and fuel. The fact that we were able to meet all of our EBITDA objectives, even with that headwind, shows that a portion of that $250 savings was falling to the bottom line. A large portion has also been reinvested in a lot of the initiatives that I talked about before, increasing our digital presence, improving efficiencies throughout our supply chain, reinvesting in systems like our that make us more productive in both customer-facing and back-office. The company was underinvested in for a long period of time, so we do have these kinda one-time investments we need to make to upgrade. The good news is that very little of it is self-developed. Because we are one of the last to implement a lot of these systems, we can pull right off the shelf, learn from what everybody else has done, and then just plug and play and go. Another example is telematics. We're investing in telematics for our vehicle fleet. We're probably one of the last players in the industry to implement this, but we can pull it right off the shelf, implement it, and then have ongoing fuel and vehicle savings based on that. We are in this reinvestment period now, but it's leading to structurally lower costs for the future. On your, you know, financial milestones, 2023, full year inflection revenue EBITDA. This quarter, you're saying you would see sustained sequential EBITDA growth. You know, kind of taking the two together, how should we think about the quarterly cadence of EBITDA, you know, in 2023? Yeah. Again, I don't wanna get into specifics of EBITDA for the quarter we just finished, but we are fully confident that we'll see the inflection that we said we would grow from Q3 into Q4. The second part of that is we would have year-over-year revenue and EBITDA growth in 2023. There's always some seasonality, particularly Q3 tends to be a higher energy cost and energy usage, quarter. For the full year, we would expect a pretty steady increase in our quarterly EBITDA cadence, probably with the exception of Q3. You know, you're fully funded through mid-2024, you know, following the May capital raise. Obviously since then, you know, the environment has evolved some in terms of the rate environment. Is this timing potentially something that might move earlier in 2024 or later in 2023, you know, given what's happened since May? Yeah, I think we feel very well positioned with our liquidity and our capital structure. We have always said we'll be opportunistic and make sure that we have the capital to accelerate the build as much as possible. You know, I think we don't need to pursue any sort of additional capital till mid-2024, but we'll continue to keep our eyes on the market. Just kind of related to that, the cost envelopes of the passings, and the cost to connect. I think on the last call you mentioned maybe the cost to connect might be, you know, maybe a little bit on the higher end. What are you seeing on both categories? Yeah, I think it's. Let me answer them separately. Cost to pass and then cost to connect. On the cost to pass, in August of 2021, when we gave our full program guidance, we said we expected to be in the $900-$1,000 range. At the time, like I had the hope that we'd be at the low end of that range, $900. With inflation both in the labor markets and the material markets, it looks like we'll be at the high end of that range, closer to $1,000. I still think we'll be in that range, but much closer to the top end. We're doing a lot of things to help offset those inflationary pressures, whether it's improving our construction techniques, taking labor out of the field by doing pre-kitting, becoming more efficient in our supply chain, figuring out how to improve the economics of our build by doing different things to stay within the $900-$1,000. There's no doubt inflation has had an impact there. On the cost to connect, similar story in that because of more expensive labor and material, we're at the higher end of that range. We have always said we should come down over time as we increase the amount of self-install capabilities that we have. We've got to get the ONTs out there for new customers. Over time, once an ONT is in place, you don't have to send a technician, you can remotely install. We're actively trying to accelerate both self-installs and hybrid installs, and over time, our cost to connect should come back down. Just to close here, you know, recognizing it's been a, it's been a tough market last year, Frontier still continues to trade, you know, around we have it at 6 times forward EBITDA. Like what do you think is the most underappreciated aspect of the, of the Frontier equity story? I think we have gotten off to a great start. We both through fortune and good strategy, we were one of the first in the industry to launch a scaled fiber build. We're able to lock up supply chain contracts for material, for labor, build out our 10 million plan. Then get a head start on everybody. We're the second largest fiber builder. Importantly, we're halfway to our goal. We put out a press release last month that said we've reached 5 million of our 10 million target. I think that differentiates us from a lot of smaller players who are just getting started or don't have the supply chain capabilities, don't have the labor locked up. That's just on the building of fiber. I also think we've earned tremendous credibility on selling fiber. The fact that we've hit our penetration targets, the fact that we've had six quarters in a row of record fiber net adds, I think all of that is building into really strong credibility that this team does what they say they will do. Great. Well, with that, yeah, thank you again, Scott, for being here today. Thanks, Anthony.