Frontier Communications Parent Inc

NASDAQ:FYBR

Earnings Call Transcript 2022-Q4

[Operator]

Hello and welcome to the Frontier Communications Fourth Quarter 2022 Earnings Call. My name is Harry and I will be your operator today. [Operator Instructions] And I would now like to hand over to Spencer Kurn to begin. Spencer, please go ahead when you are ready.

[Spencer Kurn, Investor Relations]

Good morning and welcome to Frontier Communications fourth quarter 2022 earnings call. This is Spencer Kurn, Frontier’s Head of Investor Relations. And joining me on the call today are John Stratton, our Chairman; Nick Jeffery, our President and CEO; and Scott Beasley, our CFO. Today’s presentation can be followed within the webcast available at the Events and Presentations section of our Investor Relations website.

Before we start, please turn to Slide 2. Here, you will see our Safe Harbor disclaimer. This is a reminder that this conference call may include forward-looking statements that involve risks and uncertainties that may cause actual results to differ materially from those expressed today. During the call, we may also refer to certain non-GAAP financial measures, which are defined and reconciled in our earnings presentation, press release and trending schedule.

And with that, I will turn the call over to John.

[John Stratton, Chairman]

Thanks, Spencer and good morning everyone. As you saw in our press release, the team delivered another strong quarter of operational results. Frontier’s transformation into a growing digital infrastructure company is fast becoming our reality.

If you turn to Slide 4, you will see an updated company overview through the fourth quarter. Let me run you through a few highlights. We ended 2022 with 5.2 million fiber passings crossing the halfway mark to our target of 10 million passings. We have also continued to expand our customer reach. We now serve 2.8 million broadband customers. In 2022, we generated $5.8 billion of revenue and $2.1 billion of adjusted EBITDA. This represents a 36% adjusted EBITDA margin. Our acute focus on our fiber investments and the team’s consistent execution, have delivered strong results. In 2022, fiber products alone generated $2.8 billion of revenue and $1.2 billion of EBITDA, that’s a 42% EBITDA margin.

As of the fourth quarter, fiber represents the majority of our customers, revenue and EBITDA. And importantly, our fiber growth engine is beginning to drive growth for the overall company. The end of the year is always a good time to step back and review what we have accomplished. It was nearly 2 years ago when Nick joined the company as CEO and we announced our new fiber first strategy. 2022 was our first full year of transformation with a new leadership team in place.

You will see a familiar chart when you turn to Slide 5. This is our simple strategy, which is anchored by four key levers of value creation; build fiber, cell fiber, improve the customer experience and our operational efficiency. In 2022, we met and exceeded our goals in each of these areas, delivering more high-speed fiber broadband to more people across the country, faster than expected and within our budget. And it’s all powered by our purpose, building Gigabit America, a purpose around which our entire workforce has now rallied.

Our primary focus is our fiber build. Many of you will remember our Investor Day in 2021, when we committed to building fiber to cover 10 million locations and we remain on track to do just that. In fact, with 5.2 million fiber locations today, we are more than halfway to our goal. This is a terrific use of capital. We continue to expect our fiber build to deliver very attractive IRRs in the mid to high-teens with a direct cost to pass of $900 to $1,000 per location.

Our committed build stands to create substantial shareholder value and remains our most critical point of focus. And beyond that, we are exploring a significant opportunity to create even more value. As we highlighted in Q2 of 2022, beyond our initial 10 million committed build, we have identified another 1 million to 2 million copper locations, which we can organically upgrade to fiber with very attractive returns. There remains another 3 million to 4 million locations that also could be attractive to upgrade with the aid of government subsidies.

And while our own footprint comes with meaningful cost and marketing advantages, we won’t necessarily be confined to the strict limits of our current geography. Our fiber build capability is the envy of our industry. We have developed one of the best teams for building fiber anywhere in the world and our purpose is clear. Where it can be economically built and profitably penetrated, we want to bring fiber broadband to as many Americans as possible. And with fiber penetration in America significantly lower than that of other developed nations, we see a meaningful opportunity to expand our ambition.

Let’s turn to Slide 7, where you will see our critical to-dos down the left column. And these are the goals we have set for ourselves to deliver on our strategy. And to the right, you see all that we have accomplished. And let me run through them. We built a world-class management team and board. We expanded our fiber footprint by 60%. We increased our fiber broadband customers by 25%. We surpassed our initial cost savings goal and streamlined our operations and we have improved our brand and reputation. You can see this in our record high fiber NPS scores and our improvement in churn. We did everything we said we would do and faster than expected. Over the last 2 years, we have built a strong foundation. And while this work is never done, we can confidently say that we have reached the end of the beginning. Our business is now ready to enter its next phase, our growth phase.

And with that, I will turn the call over to Nick to further describe this next stage in our evolution and to review our performance in the fourth quarter. Nick?

[Nick Jeffery, President and Chief Executive Officer]

Thanks, John. Let’s talk about our transition to growth, beginning on Slide 9. I really love this slide. We are moving fast on two of our key value drivers, building and selling fiber and it’s translating into financial growth. If you look at the left hand side, you will see that our fiber passings are up 31% year-over-year and customer growth for the quarter is up 17%. With data consumption expected to triple by 2025, it’s a great time to be in the fiber business. And I am pleased to see these results convert to revenue in the fourth quarter.

Moving to Slide 10, we expect to deliver revenue and EBITDA growth this year. And we’ll do it by pushing on the 3 key levers outlined here. We’ll accelerate our fiber build. We will command premium pricing for our premium products, and we will grow our B2B businesses. We’ll talk later about these in greater detail. First, let’s look at our Q4 results.

On Slide 11, you will see our fourth quarter highlights. Importantly, in Q4, we reached a critical milestone that we set during our 2021 Investor Day, a sequential inflection in EBITDA. This was driven by our outperformance in building and selling fiber. In the quarter, we built a record 381,000 new fiber locations and added a record 76,000 broadband customers. For context, that’s 2x more than we achieved in the fourth quarter of last year. And we had another first. We delivered fiber revenue growth across all of our businesses. One last call out, you’ll see that we continue to generate healthy free cash flow from operations which we are continuing to invest back in our fiber expansion. Scott will share more about this later in the call.

Let’s move on to Slide 12 and take a deep dive into the fundamentals of our fiber build. Since we began our fiber pilot in late 2020, we’ve scaled our build sixfold, and I’m very pleased with the fiber building engine we’ve created. So how do we do it? Well, first, we assembled what I view as the best team in the business. Secondly, we designed a sophisticated model that calculates the returns of building fiber down to every single household in our footprint. And our model is dynamic, so continuously updates based on our experience in the field. And this is how we prioritize our build to the areas that deliver the highest returns. Thirdly, we were the first to scale our build and we are already seeing the benefit of being an early mover with record customer growth in some of our key markets. Lastly, we used our scale as the second largest fiber builder in the country to our advantage, locking in multiyear contracts for equipment, fiber and labor, and this has helped us navigate the supply chain challenges in 2022.

And if you turn to the next slide, you’ll see that we plan to go even faster this year. Our plan is to accelerate our bill to 1.3 million homes in 2023. We’ll end the year with approximately 6.5 million fiber locations right on track with our initial plan that we shared with you at our Investor Day in 2021. Given we built 20% faster than we planned in 2022, we now have more flexibility with how we will use our capital in 2023. And as we have repeatedly said, we will be tightly disciplined in our use of capital. It has always been and will always be fundamental to our build plan and the way we operate this business. Our 1.3 million target allows us to accelerate the build efficiently and balance this with our ability to sell and install fiber. This helps keep us within our target cost envelope of $900 to $1,000 per location path. Chasing builds this year above our 1.3 million goal, we’ve put unnecessary pressure on our supply chain and labor environment as well as our sales and installation teams. Our build is central to our strategy, and we must convert these passings into loyal customers to transform our company as efficiently as possible.

Let’s move on from building fiber to selling it and talk about ARPU. For our sales organization, 2021 and 2022 were about overhauling our consumer offering and go-to-market strategy to stimulate customer growth. We simplified our pricing model and launched value-added services. We also use promotional tools like gift cards to sweeten the deal to new customers, while our brand repaired. And the result was strong broadband revenue growth. That is exactly what we needed during this foundational stage of our turnaround. It also set the table for us to grow ARPU by our target of 3% to 4% in 2023. And we have already put in place the actions needed to deliver this objective.

In January, we updated our pricing model to more fully match our value proposition. And part of this will mean charging for value-added services and incentivizing customers to adopt higher speeds coupled with new programs to build loyalty. We are also at a point where we can ditch the training wheels of price promotions. The early results are delivering exactly what we expected and more than 10% increase in new customer ARPU with more than 50% of new customers choosing gig-plus speeds. As our customer experience improves, so does our reputation and earning customer loyalty becomes more of a science than an art.

Let me run through just a few examples of how we improve the customer experience on Slide 15. We launched our reinvigorated brand last year, an important moment in our transformation to become a growth-oriented digital infrastructure company. We showed industry leadership as the first Internet service provider to launch 2 gigabit per second fiber broadband speeds network-wide. And we did it again just a few weeks ago with the launch of our 5 gigabit service, again, network-wide. And when you pair our blazing fast fiber broadband speeds with unparalleled reliability, it’s clear that we have the best offer in the market at the best price. And over the last 2 years, we have put the customer back at the center of our business. Every day, we hunt the customer pain points and then work hard to fix them.

For example, we rebuilt our app based on customer feedback and then introduced our first-ever chatbot to make it much easier for customers to find the answers to simple questions quickly. And I’m pleased to report that our investment in the customer experience really is working. Since our new leadership team came on board, our fiber broadband customer churn is down 33 basis points, and our fiber net promoter score is up 46 points. And we are being recognized as the market leader in the areas that matter most to our customers, like latency and speed. On the next slide, you can see that we’re gaining momentum in our commercial businesses. For the first time since I’ve been CEO, we saw positive business and wholesale fiber revenue growth in the fourth quarter. Let me break that down a bit by business.

In SMB, we had record fiber broadband customer growth and our new customer ARPU is up double digits. That thanks to newly introduced value-added services and the quick adoption of our gigabits network speeds. Enterprise is developing a stronger partnership approach with our largest customers, which has driven record-breaking fiber sales in the quarter. And in wholesale, we have now signed all 3 major wireless carriers as fiber-to-the-tower customers. And we have expanded our relationship with AT&T using our infrastructure to host their mobile edge computing capability. So I’m pleased with our progress in these businesses and excited to share more with you in the coming quarters. It’s now almost exactly 2 years since I joined Frontier, and I’m extremely proud of the progress we’ve made to transform this company into a growing digital infrastructure business.

For nine consecutive quarters, our team has consistently delivered record-breaking results and relentlessly executed against our strategy. We rallied around our purpose of building Gigabit America and we have created a culture where everyone at the company contributes to our success. And what’s really cool is that our progress is starting to be recognized.

Recently, we were awarded Best Place to Work for working parents, Best Place to Work in Dallas and named a military-friendly employer. We are building an extraordinary company that is creating long-term value for the people who work here, our customers and our shareholders. And before I turn it over to Scott, I just want to say a huge thank you to what I believe really is the best team in the business. By all accounts, 2022 was a remarkable year in our transformation. We overcame challenges, delivered for our customers and pave the way for us to become a better company. I am excited we’re starting 2023 with such great momentum.

Now Scott, over to you.

[Scott Beasley, Chief Financial Officer]

Thank you, Nick and good morning everyone. I’ll start with our fourth quarter financial results. Revenue was $1.44 billion, a slight decline sequentially as higher data and Internet services revenue was offset by lower voice and video revenue. We earned $155 million of net income and $528 million of adjusted EBITDA. $326 million of our adjusted EBITDA came from fiber products. This was up sequentially and year-over-year as we combined strong revenue growth with lower network and marketing costs. Additionally, we generated $360 million of net cash from operations, bringing our full year total to $1.4 billion. Our healthy cash flow demonstrates the underlying cash generation potential of our business and as a result of our increased focus on liquidity and working capital management.

On Slide 20, we show the strength of our fiber customer growth across both base and expansion markets. As Nick noted, our fourth quarter net additions of 76,000 customers set a new record. We grew twice as fast as we did in the fourth quarter of 2021. At the end of 2022, we had 17% more fiber broadband customers than at the end of 2021, and 26% more customers than at the end of 2020. We are making solid progress on our path to an eventual 4.5 million fiber broadband customers our committed build of 10 million homes and businesses, and this success is coming from both our base and expansion markets. In the base fiber footprint, where we have roughly 3.2 million homes, our penetration serves as a guidepost for the eventual penetration of our overall footprint.

In the base, penetration increased to 43.2%, up from 41.9% at the end of 2021 and up from 41.2% at the end of 2020. These 200 basis points of improvement in the last 2 years put us on track to achieve our target penetration rate of at least 45% in the next 2 to 3 years. In our expansion footprint, we expect 15% to 20% penetration after 12 months and 25% to 30% penetration after 24 months. Our 2020 cohort continues to exceed expectations above the top end of our 12 and 24-month guidance. Additionally, our 2021 cohort ended the year right on target at 18% after 12 months, despite getting off to a slow start in the first 6 months of 2021 prior to the current management team being fully assembled. These results give us great confidence in our ability to achieve our penetration targets, and we expect continued acceleration in fiber broadband customer growth in 2023.

Moving to Slide 21, fiber revenue growth accelerated to 7% year-over-year. Consumer fiber broadband revenue grew 15% year-over-year, driving our overall consumer business to 8% growth. This mid-teens growth rate sets the stage for our overall return to revenue growth in 2023. Additionally, fiber revenue from business and wholesale grew 6% year-over-year as the positive leading indicators that we have talked about the past few quarters have started to drive financial results. As expected, copper revenue declined roughly 10% year-over-year consistent with prior quarters as both consumer and business face legacy product headwinds.

Turning to Slide 22. In the fourth quarter, we achieved the sequential EBITDA inflection that we have been targeting since our 2021 Investor Day. Back in 2021, we set an ambitious goal of achieving a sequential increase in EBITDA by the fourth quarter of 2022. Not only did we deliver that milestone, but we also achieved year-over-year EBITDA growth in Q4, excluding subsidies. We have combined fiber revenue growth with a relentless cost reduction program that continues to be ahead of plan, and these two factors drove our sequential EBITDA inflection. Our momentum in both revenue and cost reduction gives us confidence that we will deliver year-over-year EBITDA growth in 2023.

We will now turn to capital structure on Slide 23. At the end of 2022, we had approximately $2.8 billion of liquidity to fund the fiber build. We ended the fourth quarter with $2.1 billion of cash and short-term investments and $683 million of available capacity on our revolver. In addition to the strong liquidity, we also have healthy balance sheet flexibility. Our net leverage was 3.4x at the end of the quarter. Approximately 84% of our debt is at fixed rates, and we do not have any significant maturities earlier than 2027. Our capital structure and maturity timeline provides us with a clear runway to continue accelerating our fiber build.

Moving to Slide 24, I will give some additional color on our progress in simplifying our business and delivering strong returns on invested capital. We delivered approximately $90 million of additional cost savings this quarter, bringing our cumulative cost savings to $340 million. We recently increased our cost savings target to $400 million by the end of 2024, and we remain confident in achieving this goal. Additionally, the underlying cash flow generation of our business remains strong. We generated $1.4 billion of net cash from operations in 2022, which we invested in our high-return fiber build. Our fiber build will continue to be the primary focus of capital allocation over the next several years, and I want to reinforce Nick’s earlier comments about rigorous discipline of capital deployment.

Our fiber build plan is informed by our detailed dynamic build model, which gives us great conviction that we will earn attractive mid-teens IRRs in areas where we build. Lastly, we’re committed to prudent balance sheet management. Our long-term net leverage target remains in the mid-3s. But as we have said before, we may be comfortable going slightly above this range for a period of time to continue accelerating our fiber build with a path back to the mid-3s at the end of our build.

I’ll now turn to our 2023 guidance. For 2023, we expect adjusted EBITDA of $2.11 billion to $2.16 billion, representing low to mid-single-digit growth versus 2022. We also expect full year revenue growth to be positive as well. While EBITDA may not grow sequentially in every quarter of the year due to seasonality, we do expect to deliver positive year-over-year growth in every quarter.

Next, we expect capital expenditures of approximately $2.8 billion, roughly flat year-over-year even with the acceleration of our fiber build. For additional color, we expect roughly $500 million to $600 million of maintenance CapEx with the balance coming from growth-oriented fiber build and customer acquisition CapEx. We remain confident in our projected direct build cost of $900 to $1,000 per location, although as I have said before, inflationary pressures are moving us towards the top end of that range. Additionally, due to inventory management and timing-related factors, we expect CapEx to be front-end loaded in 2023, with the first quarter higher than the fourth quarter of 2022 and then stepping down in the second half of the year.

I’ll close by reiterating our investment thesis on Slide 26. First, there is strong and growing demand for fiber, driven by expanding household data consumption. Second, fiber is a superior product. Fiber has symmetrical upload and download speeds that far exceed cable’s capability, a lower cost of ownership and lower latency levels that enable popular uses like video conferencing and gaming. Third, we have a clear strategy and purpose. We have rallied around our purpose of building Gigabit America. As we build fiber, we are making it possible for millions of consumers and businesses to connect to reliable, high-speed broadband. Fourth, we have ample liquidity and a strong balance sheet providing us with access to capital to fund our strategy.

Lastly, I’m proud to be part of a strong and experienced leadership team that has consistently delivered on our commitments every quarter. These results marked our 9th consecutive quarter of record fiber builds and our 6th consecutive quarter of record fiber broadband net additions.

I’ll now turn the call back over to Spencer to open up the line for questions.

[Spencer Kurn, Investor Relations]

Thanks, Scott. Operator, we are now ready for Q&A.

[Operator]

Thank you very much. [Operator Instructions] And our first question is from the line of Brett Feldman of Goldman Sachs. Brett, your line is open now. If you would like to proceed.

[Brett Feldman, Goldman Sachs]

Great. Thanks for taking the question. And it’s something of, I guess, a broad-based question around partnerships. So during your scripted remarks, you noted that you’re also beginning to look at out-of-region fiber deployment opportunities, some of your telco peers who have started to explore out of region opportunities have been doing that through joint ventures. So I’m curious if you think that, that would be the most appropriate format for doing that? And maybe if there are ways you might even consider partnering in-region to mitigate some of the inflationary pressures you’re seeing and maybe just to move a bit faster. And if that’s just part of the funding strategy you have in mind? And then extending this question a little bit. You’ve extended your relationship with AT&T. It now involves mobile infrastructure. So I’m wondering if you’re increasingly seeing opportunities to partner more closely with other wireless carriers and potentially getting to the point where you would be offering their wireless services in your broadband packages? Thank you.

[John Stratton, Chairman]

Hey, Brett. It’s John Stratton. So thanks. That’s a loaded question. So why don’t we do this? I’ll take – maybe I’ll take the first half, and then I’ll ask Nick to cover the second. So you raised the point that we highlighted on the front end of the call regarding opportunities beyond the original 10 million committed build, which we think is really important. And I do believe it makes sense for us to reemphasize the 10 million that we identified is by far our largest opportunity to create value, and it’s really important for our management team and everyone in the organization to remain sort of crucially focused on execution there. And of course, that’s what we will continue to work towards and continue to do. But with that said, in the course of scaling our business and improving our operational performance, we’ve created a set of core competencies that we think are really critical and particularly could allow us to unlock further value even beyond that 10 million. And so for us, the first question then is, well, what are those other opportunities. And as we identified in the middle of 2022 right inside of our own franchise, inside of our own existing footprint, we identified somewhere between 1 million and 2 million households that we see with a clear path opportunity to create sort of that same mid to high teens type of IRRs. So that’s sort of bucket number one.

Bucket number two is the balance of our franchise footprint. And it’s roughly, call it, $3 million to $4 million, which, on its own, it doesn’t lend itself to a profitable build. But if we anticipate the introduction of federal state local subsidies, it could make those more economic and could indeed unlock our opportunity to create value there. And then lastly, in areas that are not strictly within our franchise, whether they are near or somewhat near adjacencies to our current footprint, where there are places that we may pass through to get to other areas that we may cover could also unlock what could be a meaningful opportunity for us. So we are working now inside the business to further refine, first and foremost, that target opportunity set. And once we’ve made a determination of where we might build, then, of course, the next question is how would we source the capital that would be required to execute it? And to that end, there are a number of options that we could pursue. This may well be an initiative that is best accomplished via a joint venture.

So we’ve certainly started to talk about that as well internally. But candidly, we have more work to do inside before we make any definitive decisions. The way I closed that out just say we remain maniacally focused on the committed build, the first 10. But by leveraging those capabilities that I referenced, we do think we have the opportunity to drive fiber expansion both in and out of our footprint. So more to follow on that, but that’s kind of status now. Nick, do you want to take the part about other partnerships?

[Nick Jeffery, President and Chief Executive Officer]

Yes. Thanks, John. Hi, Brett. Yes, you mentioned our deal with AT&T, which started as a fiber to the tower proposition. I’m very pleased to say that’s going very well. But in fact, just on that, we’ve now extended fiber to the tower deals with all three of the major wireless operators. So, very pleased about that. But moreover, you also heard us talk about Frontier as a growth-oriented digital infrastructure company. And one element of that is recognizing the absolutely unique footprint we have with our central offices, which have space power and connectivity, very close to where people actually consume large amounts of data. And that makes that asset very attractive to anybody that’s transmitting large volumes of data back and forth between customers. And when we think about that, we think about companies like the wireless operators, but in the future, it could be companies like Amazon or Microsoft or any of those guys who are concerned with distributing the large amounts of data and therefore, needed cash close to where it’s consumed. So this is a great asset we have our central office footprint, which has power, connectivity and most importantly, proximity to consumers, but we’re now beginning to monetize through our wholesale division. I’m delighted that AT&T is our first customer.

[Brett Feldman, Goldman Sachs]

And any additional thoughts around incorporating third-party mobile into your offers?

[Nick Jeffery, President and Chief Executive Officer]

John, can I take that up.

[John Stratton, Chairman]

Sure, please.

[Nick Jeffery, President and Chief Executive Officer]

Yes. Look, as we’ve said before, we’ve got a lot of experience in the team of working in the cellular industry, of course, John with Verizon with Vodafone and Veronica, Bloodworth [ph] CNO with AT&T, plus many others across the team. So it’s something we understand very well, something we’re watching very, very closely. And as we’ve always said, behavior is really going to change, such that bundling mobile together with high-speed fiber broadband does one or two things, first of which helps us grow our core product. As you’ve seen in our results today, we are still delivering record growth in high-speed fiber broadband or when it helps us reduce churn. And again, as you’ve seen today, our churn continues to head in the right direction and is hitting records quarter after quarter. So for the moment, we don’t see the need to launch an MVNO and to bundle that with our core fiber broadband offer. That said we are watching it very closely. We think it’s something we could spin up relatively quickly and efficiently if we needed to. But we’re also conscious that doing so would be a distraction of our capital when we have such an excellent use of our capital today in building fiber broadband. So if we can carry on using our capital to do that and nothing else, we will be extremely happy if consumer behavior changes such that we need an MVNO, we will move very swiftly to do that.

[Brett Feldman, Goldman Sachs]

Great. Thank you.

[Spencer Kurn, Investor Relations]

Thanks, Brett. Operator, we are ready for next question.

[Operator]

Thank you. Our next question is from the line of Philip Cusick of JPMorgan. Philip, please go ahead, now.

[Philip Cusick, JPMorgan]

Thanks, guys. Fiber ARPU has been growing pretty steadily. How should we think about that going forward? If you had a comment on your promotions, I wasn’t sure quite where you’re going with that. But maybe you can talk about what the pricing is looking like in your fiber markets and how you expect that to trend? And then following up a little bit on Brett’s question, I didn’t quite understand how you think about the attractiveness of edge out government opportunities, which do require capital, be it, which is coming and then all that versus Wave 3 and your current funding position. Maybe you can talk about that? Thank you.

[Nick Jeffery, President and Chief Executive Officer]

Yes. But perhaps should I start on ARPU and Scott, you can add some color then John will come to you for the bead funding. Look, when we think about ARPU, I mean, the first thing I want to draw everyone’s attention to is that as we’ve spun up our operational capability over the last 2 years to become the largest pure-play fiber builder in the states, we’ve obviously had to move extremely quickly. And in doing so, that means the company is making very conscious decisions about how we allocate our resources to our markets and to our various businesses. And one of the most pressing things over that period has been to scale up our sales and sales engines. And I think we’ve done that very successfully. Our customer fiber broadband revenue has grown by nearly 30% in the last 2 years. But we’re now transitioning to a stage where we’re looking to optimize our go-to-market activities and help realize the full value that our superior offering, I think, delivers. And perhaps, Scott, I can now hand to you to talk a little bit about how we’re doing that and some of the pricing actions we’ve already taken.

[Scott Beasley, Chief Financial Officer]

Yes, that’s right. Thanks for the question, Phil. On ARPU, you saw it, it was basically flat down a little year-over-year in Q4. We’ve said we expect it to be flattish in Q1 and as we recently put in place new pricing actions. We’ve rationalized our use of gift cards, and we’re doing a lot better job targeting certain segments of the base, that should all flow through into really healthy ARPU growth in Q2, Q3 and Q4 such that by the end of this year, we will be flat for our roughly 4% a year ARPU growth year-over-year.

[John Stratton, Chairman]

Yes. And Phil, I’ll just jump on the last part and maybe a bit more on the bead process, the broader government funding process, as you know very well. It looks to be about midyear that you’ll see sort of math settled in and the funding mechanism begins to gear up with federal funding allocated to say probably late in 2023 and then the states turning and making those funds available to companies, let’s call it, the beginning of ‘24 in sort of a meaningful way. But we’ve scaled up pretty significantly in terms of our internal resources as you would expect across the whole of it, engineering, planning, lobbying capabilities, grant coordination project management, the whole thing. It’s a big initiative. There are thousands are thousands of bids that will be required across the country for the program to be realized. So Frontier does expect to participate quite significantly in that initiative. And we think it could be important to us. As we’ve mentioned, there are around 3 million to 4 million homes that sit within our $15 million overall footprint that today sort of on a stand-alone basis, absent subsidies, would not make economic sense to pass but with some level of economic subsidy could become more worthwhile and something we pursue.

One of the things that’s maybe not as obvious, though, is as you think about where those clusters reside within our broader geography, there may well be homes that don’t require direct subsidization, but when you pass the long throw to get to those homes that would be part of a bead subsidized build, that they suddenly become more addressable. They become more profitable because you’ve now sort of gotten close enough that you can finish out a build. So those numbers are actually kind of interesting. And that sits both inside and outside of our footprint. So where you have near adjacency, you gain sort of marketing, distribution, service and reputation advantages. It allows you to move quickly in terms of the speed of build and how quickly you can scale operations. So, all of this is open for discussion. The question about how it might be funded is something we won’t answer today, but we are certainly open to the notion of partnerships, joint ventures and the like to go there for both availability of fundings plus the speed with which it can be executed, so more to come on all of this as the situation continues to evolve and develop. But for today, that’s kind of where we’re seeing it.

[Philip Cusick, JPMorgan]

Thanks, John. Scott, if I can follow-up one thing. I didn’t quite understand your ARPU comment. Should we be looking at ARPU growth at the end of the year? Is that the target now?

[Scott Beasley, Chief Financial Officer]

That’s right. Even by Q2, we should be growing sequentially again. So again, Q1, we expect to be flattish with where we ended Q4. But with the results of the pricing actions we’ve taken the, like I said, rationalized use of gift cards by Q2, we should be growing again sequentially.

[Philip Cusick, JPMorgan]

Thanks very much.

[Spencer Kurn, Investor Relations]

Thanks, Phil. Operator, we are ready for next question.

[Operator]

Thank you. Our next question is from the line of Michael Rollins of Citi. Michael, please go ahead now.

[Michael Rollins, Citi]

Thanks and good morning. Two questions. First, just curious if you could provide more detail on the broadband operating environment. And you did earlier in the discussion in your slides show how you’re doing on market share, particularly in some of the vintage fiber market. I’m just curious what you’re seeing on a go-forward basis on the opportunity to take share relative to what’s happening with move rates possible cable reactions and any impact you are seeing on wireless, particularly on the copper side? And then secondly, as I look at the breakdown of fiber EBITDA versus copper EBITDA, it looks like there may have been a step-up in fiber and step down in copper. I am just curious if you could talk about some of the contributing factors. And if there are additional step changes in profitability between these two segments as you look out into the future beyond just what you might get from the operating leverage of growing fiber revenue. Thanks.

[Nick Jeffery, President and Chief Executive Officer]

Yes. Thanks Michael, Nick here. Look, on the broadband operating environment, as we have said in previous calls, fiber broadband and broadband in general, in the U.S., of course, is a highly competitive market. At the same time in I think 86% of our footprint, we have one or fewer competitors. But as we transition this company to being a fiber-oriented, growth-oriented digital infrastructure company, it’s true that we are taking market share in the majority of our markets as we head towards our terminal penetration of 45%, which we discussed on previous calls. Now, just to remind everybody, why do we believe 45% is doable, well, for a couple of reasons. Firstly, that historically, many of our markets were at or above that level of penetration. So, in a sense, it’s getting back to where we were before as we become more operationally focused and efficient within the market structure I have already described. Secondly, we have already got some of our key states at or above that level. So, we know it’s doable in today’s environment. And thirdly, we believe we have got the best product at the best price that’s highly attractive to consumers. And so we are seeing good early uptake on the cohorts of fiber builds that Scott shared with you and perhaps Scott, we can talk about that in a second. The majority of our customers are still coming from cable as one of the sources of growth for us versus movers or copper conversions. And on the impact of wireless or fixed wireless access, I mean, yes, as we said before, it’s a feature of the market now. We think it is economically self-limiting. We think it is a very different proposition to full symmetrical high-speed fiber broadband. And if you think about it for an average household with multiple 4K TVs, gaming stations, 5, 10, 15 cellular devices and so on and so on, if fiber is available, you will take fiber. So, we think FWA is a feature of the market, but it serves very different segments, tends to serve, more itinerant groups, building sites, construction sites, those sorts of things, and it has its purpose there. And therefore, it will nibble around the edges of our copper base. But I think when fiber rolls into town, people will choose fiber. Scott, do you want to pick up on the other bits of that?

[Scott Beasley, Chief Financial Officer]

Sure, Michael, this is Scott. On your question around fiber and copper EBITDA, I would say, we are continuing the same trend of fiber EBITDA continues growing quarter-after-quarter and copper EBITDA has declined quarter-over-quarter for the last several years. This was a step-up because we stepped up the overall performance of the company. So, we had a $50 million sequential step-up on fiber EBITDA. Most of that was revenue driven. We had really strong consumer fiber revenue growth finally, business and wholesale fiber revenue growth, which was the first time in several years. So, most of that was revenue driven. But then we are also ahead of plan on our cost reduction efforts. And so as fiber becomes an increasing part of our base, fiber benefits from those cost reductions, whether it’s headcount, footprint rationalization, better efficiency in our workforce. So, all of those things drove the $50 million step-up in fiber EBITDA over the quarter.

[Spencer Kurn, Investor Relations]

Thanks Michael.

[Michael Rollins, Citi]

Thank you.

[Spencer Kurn, Investor Relations]

Operator, we will take our next question please.

[Operator]

Certainly, our next question is from Jonathan Chaplin of New Street. Jonathan, please go ahead.

[Jonathan Chaplin, New Street]

Great. Thanks for taking the question, guys. The 10 million initial build target, are you still expecting to hit that in 2025? And if so, sort of requires an acceleration in ‘24, ‘25, can you talk about what will change in terms of the constraints that are limiting the pace of deployment this year and will allow you to go faster next year and the year after? And then sort of on the same theme, but drawing back a little bit, I see a little bit of attention in some of the comments where you talk about this phenomenal fiber deployment machine that you built at tend of all the industry. And indeed, it is with phenomenal opportunities beyond the 10 million in bid markets at the edge of your footprint. But at the same time, the pace of the deployment in ‘23 is going to be slower than it was in the fourth quarter of ‘24 to help sort of tie those elements together a little bit for us, if you can? Thank you.

[John Stratton, Chairman]

Yes. Hey, Jonathan, it’s John. I will start very briefly and I am going to pass it pretty quickly to Nick. When we talk about those competencies, when I think about where we were just 2 years ago, it is pretty remarkable and a real sort of complement to the team broadly and all the way across the organization to how fast they have managed to scale the business. And it’s easy to forget where we started. But the ability to go from 60,000 build to 600,000 to 1.2 million and now to continue accelerating the build to 1.3 million here in 2023 is pretty remarkable. But with that, beyond the build itself, it’s also the balance of our internal infrastructure that needs to similarly scale at a very rapid pace. The ability to scale installation capacity, the ability to scale of distribution capacity, the ability to scale service delivery and not only scale it but improve it as you go, the whole of that effort is what’s talked about here. And I think that the pivot you see in terms of our approach to 2023 is about synchronization, and it’s about ensuring that the whole of our execution is efficiently and effectively delivered. So, in the beginning, when you first start, you are doing everything you can to just scale fast to get the thing moving and moving forward. And then as you go, you start to say, okay, how do I perfect this, how do I make this better in terms of the rational way that you go about execution on a day-to-day basis. So, maybe Nick, if you can sort of start in on the why 1.3 for this year and then sort of how we think about what comes next.

[Nick Jeffery, President and Chief Executive Officer]

Yes. John thanks. I mean as you say, just to echo a couple of those points, two important facts, Jonathan, I think to land on. Firstly, building 1.3 million fiber passings this year will mean we will have delivered by the end of the year exactly the build ambition that we set out at emergence 2 years ago. And secondly, as John said, we are actually accelerating our build this year. And I think we are the only at-scale fiber builder to be saying that as we go into the year. Now, we take a step back, as John said, when I got here, we had to rebuild or scale almost every operational element of this business to execute our strategy and scale up to building fiber with real pace. And I think we have done this well. In fact, as you already know, the build in 2022 was 20% – more than 20% faster than we had originally predicted. And what that gives us is some operationally, some operational flexibility and optionality about how we optimize results across the entirety of our company to maintain both strong capital discipline. And as a result, our mid to high teens return on capital, which as we have always said, is a huge focus for the business. So, I think to get to the straight answer to the straight question, the way to think about our build ambition of 1.3 million homes passed this year is at a minimum build from here on. We think we have got plenty of operational gas in the tank to further accelerate if and when the conditions are ready for that.

[Spencer Kurn, Investor Relations]

Thanks Jonathan. Operator, we will take our next question, please.

[Operator]

Thank you. Our next question is from the line of Frank Louthan of Raymond James. Frank, please go ahead now.

[Frank Louthan, Raymond James]

Great. Thank you. On the business side, can you comment a little bit about that environment? Where are you getting the traction most? Are you seeing any fixed wireless come in on the very small end of that? And then what are you hearing against the current economic backdrop as far as customers, what they are preparing for? Thanks.

[Nick Jeffery, President and Chief Executive Officer]

Yes. Perhaps, Scott, you could start with the – what are we seeing from a sort of customer behavior perspective?

[Scott Beasley, Chief Financial Officer]

Sure, Frank. We track it closely, and we have not seen any impact of broader macroeconomic conditions on our customer base. Two of the most important metrics to us are days sales outstanding, which are basically flat with where they were last year. Bad debt expenses actually trended down because the consumers remained healthy, and we have an even higher portion of our customers on auto pay, which has been a nice operational improvement. So, we watch it closely, but haven’t seen an impact from the broader macro economy on our customer base.

[Nick Jeffery, President and Chief Executive Officer]

Yes. Thanks Scott. Look, on business, Frank. I think the first thing is the new leadership that we welcomed into Frontier just only a couple of quarters ago. Really are already driving significant operational improvements and we are seeing that flow through into our performance. And indeed, across all three business units, we are seeing a sharp increase in order volume and a much more favorable sales mix, which is leading to higher pricing and flowing through into the P&L in a very positive way. Fiber revenue from business and wholesale, as we said in the presentation, grew 6% year-over-year. And as positive leading indicators that we have talked about over the past couple of quarters are now flowing through into P&L and financial impact. And part of this change is driven by our strategic agreement with AT&T. We talked about that earlier on the call. But also its driven by our much greater focus on the SMB, small and medium sized businesses within our overall business mix, where these customers have a high propensity to buy high-speed symmetrical fiber services and where there is a great synergy between our business operations and our consumer operations, where essentially the same machine is very efficiently serving both consumers and small business customers. This was an area which had been frankly ignored in the past by the company. And so we had built passings past many, many thousands of small businesses, but not gone back and connected them, so we are going and doing that. And we built up a team who are really expert in that. And of course, we have the marketing propositions, pricing propositions, go-to-market tactics and so on, which are now flowing through into results. But if we take a step back on the business market overall, and say, okay, why is Frontier starting to perform well when perhaps you see in others a continual decline, but a number of things just to draw your attention to. First of which is we are a small part of the overall market. So, in many senses, we do not reflect overall market dynamics. Secondly, we are much less exposed to large enterprise customers than some of our enterprise peers. And we are, if anything, accelerating our shift towards focusing on SMB customers, whereas I said just now, there are strong operational marketing pricing synergies with our large consumer base. And certainly, we have got a new executive team across all of our enterprise businesses that are really beginning to drive strong operational improvements day-in, day-out. And as we think about this going forward, we have really got a number of targets to measure our progress in the business market. The first step was to inflect on business fiber growth sequentially, which we have achieved this quarter. The second step is going to be to grow our fiber business revenue year-over-year, and we expect to do that in 2023. And the third is for fiber growth to offset copper declines, which we think will happen sometime after 2023. So, I am optimistic about our progress in our business segments. I think we have made a great start, but the best is yet to come.

[Spencer Kurn, Investor Relations]

Thanks Frank.

[Frank Louthan, Raymond James]

Thank you very much.

[Spencer Kurn, Investor Relations]

Thanks Frank. Operator, we will take our next question, please.

[Operator]

Our next question is from Greg Williams of Cowen. Greg, your line is now open.

[Greg Williams, Cowen]

Great. Thanks for taking my questions. I wanted to feed off the last question on the optimism on business services. So, in your guidance today, does that assume that wholesale has now stabilized year-over-year? And is wholesale still about half that overall makeup? Second question is just on the expected capital raise you will need in 2024. It sounds like the debt markets are open to you guys. And more specifically, was wondering about your opportunity to tap securitized debt. I know maturing that pulled off securitized debt raises last October. Is that something you can explore, or do your debt covenants on your existing bonds precluded you from doing so? Thanks.

[Scott Beasley, Chief Financial Officer]

Yes. Greg, this is Scott. Let me take both of those. So, our guidance for 2023 EBITDA’s growth implies the business and wholesale stabilized to slightly grow year-over-year in 2023 versus 2022. Now, the primary growth engine we will have in ‘23 will be consumer revenue. We are further along in that transformation and have allocated more capital to the consumer fiber build, but business and wholesale together should stabilize. On your second question on funding, I would say we are considering a range of debt funding mechanisms. We have significant capacity first lien. We have other options ahead of us. So, we are exploring all options, but really are confident in our ability to continue funding the fiber build and continue accelerating.

[Spencer Kurn, Investor Relations]

Thanks Greg. Operator, we will take our next question.

[Operator]

Thanks very much. Our next question is from the line of Nick Del Deo of MoffettNathanson. Nick, please go ahead now.

[Nick Del Deo, MoffettNathanson]

Hey. Good morning. Thanks for taking my questions. First, as we think about some of the changes you are making from a pricing and promotional perspective, we obviously should think about that being linked to net adds. So, as we think about the pricing that you put through and your plan to rely less on gift cards or promotional tools, should we be worried at all that, that’s going to result in any sort of headwind to net adds, or do you feel comfortable that it’s not going to be an issue?

[Nick Jeffery, President and Chief Executive Officer]

Yes. Nick, it’s Nick. Good question. Thank you for that. And it’s something we think about in lots and lots of detail. But this is a dynamic market and all the players are moving pricing and promotion all the time. And we watch this just through a microscope every single week of every single quarter. And we reflect and ask on that all the time. And I would say that because the big thoughts underpinning all of our moves is the recognition that we have the best product, and we want to deliver it at the best price. Now, the best price is something is determined by the market. But the best product is something that’s driven by the underlying technology that we have. And we believe consumers have a strong appetite for the best product at the best price. Now, as we look at the evolution of our pricing strategy over the last couple of years, it’s very clear 2 years ago that through bankruptcy and before, Frontier had a troubled brand and it needed to compensate that with pricing, promotion tools and so on. As we repair the brand, as we improve the product, as we were the first to launch 2 gig symmetrical network wide, we have just become the first launch 5 gig symmetrical nationwide and extend that pricing ladder and give more options for customers to enjoy these, the benefits of high-speed symmetrical connectivity. And as we begin to layer in value-added services, which we started, but there is many more and some really exciting ones still to come. So, we see the brand repairing. We see our ability to price at a different level and still be accepted by consumers repairing. And so we are moving inch-by-inch, yard-by-yard, mile-by-mile to repair the brand and to charge what we think is at the right price for the best product in the market. Now frankly, at any price, our product does what cable can’t because we deliver symmetrical high-speed network services that the cable can’t, and we know that. So, we also see a separation in our proposition between kind of core cable and what we do. And that begins to come on to price premium as we are seeing with the launch of our 5 gig services recently. So, it’s something we watch carefully. We always want to provide the best product and the best price. And we believe that as the brand repairs as consumer knowledge of Frontier improves so we can maintain our gross and net add performance whilst charging a fair price for the best product.

[Nick Del Deo, MoffettNathanson]

Okay. Thanks for all that detail. Maybe one for Scott, you have obviously made very progress – a very rapid progress with respect to your cost savings initiatives. What are the big cost buckets that you are attacking from here to get to the $400 million? And how comfortable are you with achieving that target within the timeframe you have laid out before you can move on to the next target?

[Scott Beasley, Chief Financial Officer]

Sure. Thanks Nick. Number one, we are very confident in achieving our $400 million target by the end of 2024. We are already north of $300 million with a clear line of sight to get to $400 million and beyond. I will give you a little color on the different buckets of cost savings. We have a lot of frontline productivity improvements still ahead of us improving technician productivity, giving them better tools in the field to take costs out of the system. We have a lot of back office automation. We are still very immature in the automation journey and have a lot of work to do there. As Nick mentioned, we are doing – investing a lot in self-service capabilities for customers to service themselves and nobody wakes up and says they want to call their Internet provider that day. So, we want to make it easier for our customers, which also takes costs out of the system. So, a wide range of cost savings improvements and we have a lot of confidence that we will exceed the $400 million target that we have.

[Spencer Kurn, Investor Relations]

Thanks Nick. And that concludes our fourth quarter 2022 earnings call. Thanks everyone for joining.

[Operator]

Thank you. This concludes today’s call. You may now disconnect your lines.