Frontier Communications Parent, Inc. (NASDAQ:FYBR) Q4 2023 Earnings Call Transcript
Frontier Communications Parent, Inc. (NASDAQ:FYBR) Q4 2023 Earnings Call Transcript February 23, 2024
Frontier Communications Parent, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. Thank you for attending today's Frontier Communications Fourth Quarter 2023 Earnings Call. My name is Cole, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I'd now like to pass the conference over to our host, Spencer Kurn. Please go ahead.
Spencer Kurn: Good morning, and welcome to Frontier Communications fourth quarter 2023 earnings call. This is Spencer Kurn, Frontier's Head of Investor Relations. Joining me on the call today are Nick Jeffery, our President and CEO; and Scott Beasley, our CFO. Today's presentation can be followed within the webcast available in the Events & Presentations section of our Investor Relations website. Before we start, please see our safe harbor disclaimer on Slide 2. 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. With that, I'll turn the call over to Nick.
Nick Jeffery: Thanks, Spencer. Good morning, everybody. I'm here with Scott today in our new Dallas headquarters, and we're looking forward to sharing our Q4 results with you and providing 2024 guidance. But before we do that, I'd like to take a moment to ground us on where we are today, nearly three years into this great American turnaround story. From the beginning, we said 2023 would be the year that we would return to sustainable growth. And I'm pleased to share with you that we did exactly that. For the first time in more than a decade, we achieved full year EBITDA growth. And this accomplishment is the result of our team's relentless execution of our strategy. It's the culmination of the strong operational results we've achieved quarter-after-quarter, and it's the most compelling evidence yet that our fiber-first strategy is working.
Today, we are the largest pure-play fiber provider in the country. We've scaled our fiber build, ending the year with 6.5 million fiber passings. Easy math puts us at 65% of the way towards our goal of building to 10 million fiber locations. And we've connected a record 2 million customers to our high-speed fiber broadband network and that's noteworthy because our fiber broadband customers now represent two-thirds of our total customer base. And this is a remarkable evolution in just three years. As fiber continues to become a greater share of our business, we will become an even stronger company. So how do we build this leadership position? Well, if we turn to Slide 5, we can see that the answer is in the consistent execution of our strategy: build fiber, sell fiber, improve customer service for all customers and increase our operational efficiency.
So let's take a closer look at each of these components. It all starts with our fiber build. Last year, we increased our fiber footprint by 25%, and we've doubled it since we began our build back in 2020. We continue to stand out from the pack as the only scaled fiber builder to add more fiber passings year-after-year. The second pillar is selling fiber. Fiber is a superior product. And as data usage continues to grow exponentially, this only becomes more true. There's a need for speed that only fiber can deliver, and that's showing up in our customer growth. Today, we have 50% more broadband customers than we had three years ago. And I'm proud to share that last year, we gained market share against every competitor in every market we serve, and we did so whilst also growing ARPU.
Scott will talk more about our fourth quarter performance shortly. But to give you a preview, we grew broadband customers by 19% year-over-year, with ARPU up 5%. Next, let's talk about the improvements we've made to our customer service. Last year, we saved our customers a collective 50 years of time on the phone by eliminating 2 million service calls from a total of nearly $9 million the year before. Even more impressively, we did so whilst growing our broadband customer base by nearly 20% over the same period. This was the result of us putting the customer firmly back at the center of our universe. We have removed thousands of customer irritations and invested in digital self-service tools like our app and our AI chatbot. We made it easier for customers to interact with us digitally and in many cases, eliminated the need for customers to contact us at all.
The outcome, churn is down to near record levels and MPS has skyrocketed. And we are now the industry leader in fiber broadband customer satisfaction as measured by independent NPS research. And finally, we've become more efficient. We've simplified the way we work, introduced new technology to improve how we operate and right-size our real estate footprint. This focus on operational efficiency has achieved over $500 million in cost savings since 2021, and that's double our initial target. If we take a step back and look at our performance over the past three years, we've clearly delivered an operational turnaround. And if we turn to Slide 6, you can see how these results are now driving sustainable financial growth. I love this chart. It clearly shows how building and selling fiber is delivering EBITDA growth.
You can see here that our strong execution drove fiber EBITDA growth of 14% in 2023, which lifted total company EBITDA growth into positive territory for the first time in a decade. This is a critical inflection point that we've been working towards over the past three years and an important milestone in our progress towards unlocking the next phase of our growth. Underpinning these results is our fiber broadband revenue, which grew 20% in 2023, that's up from 13% in 2022 and 12% in 2021. We've created a model for driving sustainable growth. It's a virtuous circle. We put fiber in the ground, we connect more customers to our superior fiber product, we offer higher gig speeds and value-added services, delivering higher ARPU, which all leads to revenue growth.
We invest that revenue back into our company for the benefit of our customers and our business. It's repeatable and scalable and the value created at every turn of this flywheel. With the strong results we delivered in 2023, I'm confident that we will accelerate our growth in 2024 and beyond. Which brings me to the priorities for this year, which you can see on Slide 7. I'm going to share an overview of our plan, and then Scott will provide more detailed 2024 guidance later in the call. Firstly, we will execute our strategy with determination and rigor, just like we did last year and the year before that. Specifically, we plan to build 1.3 million fiber locations again this year. We plan to add more fiber broadband customers in 2024 than we did in 2023, whilst also accelerating ARPU growth at or above 3% to 4%.
And we plan to improve our customer service and streamline operations to deliver benefits to our customers and to our bottom line. Secondly, we plan to accelerate fiber revenue growth, which will drive overall company revenue growth in 2024. We expect this top line growth to come from an acceleration in consumer revenue with Business and Wholesale remaining relatively stable and importantly, we plan to accelerate EBITDA growth into the mid-single digits this year. So let me wrap up by saying a huge thank you to the builders of Gigabit America. Everyone at Frontier paid a role in making 2023 a success and I'm confident that 2024 is going to be our best year yet. Before I turn it over to Scott, I want to remind everybody that we're planning to host an investor update later this year.
The event will be held in the second quarter and we plan to provide additional detail on our longer-term financial goals and a path to driving additional shareholder value. So please stay tuned for more information. Scott, over to you.
Scott Beasley: Thank you, Nick, and good morning, everyone. The team delivered another excellent quarter of operational and financial results. I'll walk you through the highlights from the quarter and then share our guidance for 2024. Slide 9 is a snapshot of our Q4 operational highlights. We passed 333,000 new fiber locations and exceeded our goal of 1.3 million fiber passings in 2023. We added 84,000 fiber broadband customers in the quarter. Importantly, we grew our customer base while also growing ARPU by 5% versus Q4 of 2022. We implemented numerous initiatives early in 2023 to drive ARPU growth. We offered faster speed tiers, adjusted pricing and started charging for value-added services. As a result, nearly 60% of our new customers are taking speeds of 1 gig or faster, and roughly 45% of customers purchased at least one value-added service.
Consumer fiber broadband churn also improved to 1.20% in the quarter, that's down 12 basis points from the prior year. Last, we achieved double our initial cost savings target at the end of 2023, surpassing $500 million of savings for the program. Let's turn to Slide 10 to show how our strong operational results drove improved financial performance. In the fourth quarter, revenue was $1.43 billion, strong consumer fiber revenue growth of 11% drove total consumer revenue growth of 1%. We had $17 million of net income and earned $549 million of adjusted EBITDA, that's up 4% year-over-year. This was our fastest quarter of EBITDA growth since 2016. $356 million of our adjusted EBITDA came from fiber products. Additionally, we generated $296 million of net cash from operations, bringing our cash from operations to $1.3 billion in 2023.
Let's dive deeper into each of our core growth drivers. Our EBITDA growth has been driven by accelerated customer growth, healthy ARPU growth and a significant cost reduction program. If you turn to Slide 11, you can see our progress growing our fiber broadband customer base. We ended 2023 with a record 2 million fiber broadband customers. The 2 million figure is a significant milestone, representing roughly 50% growth since the beginning of our transformation. Our base fiber penetration now sits at 44.5%, close to our target of 45%. In expansion markets all cohorts are performing at or above our target ranges at 12 months and 24 months. Our smaller 2020 build cohort, roughly 86,000 fiber locations reached penetration of 35% at 36 months. We are now almost 80% of the way to our terminal penetration after just three years.
Turning to Slide 12. Our success gaining customers is translating into fiber revenue growth. We ended the year on a high note with strong fiber revenue growth, driven by our consumer performance. Consumer fiber revenue grew 11% in Q4, and we are confident that this trend will continue to accelerate in 2024. For the second quarter in a row, consumer fiber revenue growth offset copper declines resulting in total consumer revenue growth of 1%. This was a key inflection point for us two quarters ago, as the lift from consumer fiber broadband finally began to more than offset the declines of legacy video and voice products. As this dynamic continues, we expect consumer revenue growth to further accelerate in the coming quarters. Business and Wholesale fiber revenue declined 2% year-over-year as growth in SMB and enterprise was offset by declines in wholesale.
Q4 was a difficult comparison for wholesale because of several one-time benefits in the fourth quarter of 2022, as the wholesale business tends to be lumpy. We expect fiber Business and Wholesale revenue to return to year-over-year growth in Q1. Moving to Slide 13. Our customer and revenue trends led to an important acceleration in EBITDA growth. We grew adjusted EBITDA by 4% in the fourth quarter. As Nick shared, EBITDA growth for the year was primarily driven by fiber revenue growth. At the same time, we took cost out of the business and managed copper declines. It was the same story for the quarter. At our 2021 Investor Day, we set out a plan to reverse our structurally declining EBITDA by the end of 2022, and we expected full year EBITDA growth in 2023.
Through the hard work of our 13,000 plus employees, we returned to full year EBITDA growth in 2023. And importantly, our growth accelerated throughout the year. We'll talk in a few minutes about our expectation to accelerate adjusted EBITDA growth in 2024, but I want to thank our team for hitting this critical milestone. Let's spend a few minutes on capital expenditures and liquidity before we get to 2024 guidance. We delivered capital expenditures of $3.21 billion, plus $4 million of vendor financing for total capital investment of $3.22 billion. As expected, our fiber build spend declined in the second half of the year, as we consumed prework in inventory, managed working capital and benefited from a lower cost build mix. There are two points that I'd like to highlight on capital investment.
First, our 2023 direct build cost per location landed within our range of $1,000 to $1,100 per location. Since we began building fiber in 2020, we have passed roughly 3.3 million new fiber locations at a direct bill cost of approximately $920 per location. We continue to expect future passings to cost approximately $1,000 to $1,100 per location, resulting in a total project spend in the $1,000 range per location passed. Second, the mix of our capital investment will continue to evolve in 2024. We expect our fiber build spend to begin to decline, while our customer acquisition CapEx will increase with higher gross adds. Overall, we expect capital investment in 2024 to be lower than 2023. We continue to have high confidence that our fiber build will deliver IRRs in the mid to high-teens, well above our cost of capital.
Once we are through the investment phase, our business will generate significant growing free cash flows. We'll now turn to liquidity on Slide 15. At the end of the quarter, we had $3.2 billion of liquidity. As we shared in August, our landmark fiber securitization deal gives us a path to fully fund our build to 10 million passings. In addition to our strong liquidity and access to capital, our balance sheet remains healthy with approximately 87% of our debt at fixed rates. Finally, we do not have any significant maturities until 2027. I'll close today on Slide 16 with our 2024 guidance. The most important part of our guidance is adjusted EBITDA, which we expect will accelerate to mid-single digit growth this year. We expect adjusted EBITDA of $2.20 billion to $2.25 billion in 2024, and we expect to deliver year-over-year growth in every quarter.
We also expect full year revenue growth as accelerating consumer growth combines with roughly stable Business and Wholesale performance of plus or minus 2%. Operationally, we expect to pass another 1.3 million locations with fiber. Right now, this is our optimal build pace as we balance speed with operational efficiency. We also expect cash capital investment, which includes capital expenditures and vendor financing payments of approximately $3.0 billion to $3.2 billion, representing a decline versus 2023. As we scaled our fiber build, we've been able to secure more favorable payment terms in line with the rest of the industry. Vendor financing payments are included in our capital investment guidance, meaning that the $3.0 billion to $3.2 billion will be comprised of two lines from the cash flow statement, capital expenditures and payments of vendor financing.
Finally, in terms of cadence, we expect timing related factors to result in capital investment being front-end loaded in Q1 at a level similar to the first quarter of 2023, and before stepping down materially in the second, third and fourth quarters. As I wrap up, I want to say thank you to our amazing Frontier team for delivering these results. We set a new bar for success in 2023 by placing the customer at the center of everything we do, and I'm looking forward to doing it again in 2024. Operator, we'll now open the line for questions and I'd ask our participants to limit themselves to one question and one follow-up.
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