FYBR - NASDAQ

Hello, everyone and welcome to the Frontier Communications Q3 2021 Earnings Conference Call. My name is Charlie and I'll be coordinating the call today. And I have the pleasure of handing over to your host Spence Kurn, Head of Investor Relations to begin. Spencer, please go ahead.

Good morning, and welcome to Frontier Communications third quarter 2021 earnings call. This is Spencer Kern, Head of Investor Relations to begin. I would like to note that the presentation can be followed up within the webcast is available in the Webcast and Events section of our Investor Relations website. During this call, we will be making certain forward-looking statements. Forward-looking statements by their nature address matters that are uncertain and involve risks, which could cause actual results to be materially different from those expressed in such forward-looking statements. Please review the cautionary language regarding forward-looking statements found on page two of the presentation. On this call, we will discuss certain non-GAAP financial measures. Please refer to the presentation for how management defines these measures and certain shortcomings associated with these measures. Reconciliations of these non-GAAP measures to the closest GAAP measures can be found in the presentation. I'm joining the call today by John Stratton, the Executive Chairman of the Board, Nick Jeffery, President and Chief Executive Officer, and Scott Beasley, Chief Financial Officer. I will now turn the call over to John.

Good morning, everyone. And thank you for joining today's discussion. Our business continues to be well positioned to win in key markets and to execute on a unique opportunity to create significant shareholder value. We have a solid foundation of fiber assets and infrastructure, a significant customer base and strong competitive positioning. In the last 12 months, we generated $6.6 billion of revenue and $2.6 billion of adjusted EBITDA which represents a 39% adjusted EBITDA margin, and driving this performance, our $2.8 million broadband customers across both consumer and commercial businesses. As we've said before, fiber is the future of Frontier. $1.1 billion of our EBITDA in the last 12 months has been generated from our fiber products. And we're investing to grow our fiber EBITDA rapidly. We have approximately 400,000 businesses within 250 feet of our fiber, and over 23,000 Towers within one mile of our fiber. As we continue to build out our network, we expect to grow and convert these attractive and footprint opportunities. 2021 has been a pivotal year for Frontier. Our transformation began when Nick Jeffery Jeffrey joined in March, and we recruited a talented new Board of Directors with high levels of subject matter expertise across key areas, including digital transformation, brand development, capital investment, operational efficiency and of course telecom strategy. We emerge from bankruptcy at the end of April and are listed on the NASDAQ exchange on May 4. We refocus the company around a simple but powerful purpose to build Gigabit America and announced our accelerated build plan to reach 10 million locations with fiber by 2025 at our Investor Day in August, Nick has spent a significant amount of time recruiting a world class executive team and the team has started to make an immediate impact on the business, even though the third quarter was the first full quarter at Frontier for most of our executive team. Transformations of this magnitude take time. But this team is executing with a sense of urgency that is a new discipline for Frontier. By almost every account, the team is executing extremely well. And Nick will talk in more detail about our key accomplishments for the quarter. We're also increasingly encouraged by the long-term secular tailwinds behind our fiber-centric strategy. Demand for high speed broadband is increasing at an accelerating pace between 2020 and 2025 uses is expected to triple and fiber is the best product to meet this rising demand. First, fiber's performance is vastly superior to cable today, the 34% faster download speeds, and roughly 18 times faster upload speeds and 42% lower latency levels than cable. Looking forward, fiber will continue to outpace alternatives, featuring symmetrical download and upload speeds and a clear low cost path to 10 gigabit service and beyond. And Frontier is uniquely positioned to capitalize on building fiber, our incumbent position afford us roughly 20% cost advantage versus a new entrant. And we are well positioned to competitively. In nearly 90% of our footprint, we have one or fewer competitors, giving us a significant opportunity to build upon the strong foundation of our current network. Our company's purpose is to build Gigabit America. And we're encouraged that the government is aligned with this purpose. The digital divide in the United States is enormous with just 30% of US households passed with fiber versus over 90% at many other developed nations. The government has already passed legislation that will drive an estimated five to six times increase in broadband stimulus over the next few years. We believe government funding should be targeted at the locations that will be uneconomic to pass the private capital loan. We expect to be an active participant in these programs, and believe we're strongly positioned to meet this need at the lowest cost. And importantly, I want to reaffirm our commitment to ESG as we build a future backbone of our nation's connectivity infrastructure. This commitment aligns well with growing pools of capital directed at ESG investments. We continue to invest in products that connect underserved communities and rural areas in our footprint, helping to bridge the digital divide. We are committed to creating a safe, healthy and inclusive workplace in which our people can thrive. We're also committed to investing in the communities where our employees live and work. We recognize our responsibility as stewards of the environment and our opportunity to lead on sustainability in the industry. Fiber is a passive technology and uses less energy than competing technologies like cable. As we upgrade our copper network to fiber will be on a path to reduce our greenhouse gas emissions and footprint significantly. And lastly, we're committed to modeling the highest standards of governance. We have a board with diverse backgrounds and relevant experiences and skills with a separate Chairman and CEO role. We have implemented comprehensive compliance and ethics programs, and have built a pay for performance compensation philosophy into our executive compensation programs. We look forward to providing more details on our ESG commitments as we continue to make progress on our ESG journey. We built our strategy around four key levers of value creation. Expanding our fiber footprint is at the core of our strategy. We plan to accelerate our fiber deployment to be able to reach over 10 million homes by the end of 2025. Along with growing our footprint, we'll be launching new best-in- market products to meet customer demands, and increased penetration in our fiber footprint. Of course, it's not all just about winning customers, but also how we engage with customers. Our goal is to deliver an exceptional experience throughout the customer journey. Lastly, we've looked across all parts of our company to identify opportunities to simplify how we operate and to focus our operations. And through this process, we've identified significant potential to reduce our operating expenses and simplify the business. I'll now turn the call over to Nick to review how we performed against these initiatives in the third quarter. Nick?

Thanks John. Frontier is in the early stages of its transformation. Most of the new executive committee has been here for just one full quarter. So I'm really pleased with the significant progress made in executing our strategic priorities in this very short period of time. During Q3, we build a record 185,000 new fiber locations, bringing a year-to-date new passings to nearly 450,000. We added a record 29,000 new fiber broadband customers, nearly a five fold increase over the same period a year ago. We have signed multiyear agreements with key labor and materials partners to secure important parts of our supply chain. Although, supply chain concerns persist across the economy, we feel as well positioned as possible given our risk mitigation actions. In October, we raised $1 billion of debt, which secures funding for our Wave 2 build through to the middle of 2023 at our already announced build rate, and we continue to round out our world class executive team with two important new hires. Melissa Pint joined Frontier as our Chief Digital Information Officer. Melissa was most recently the Head of Technology at JC Penney, where she designed and implemented a digital strategy to accelerate the company's turnaround. And Charlon McIntosh joined Frontier as our Chief Customer Operations Officer. Charlon joins us from Humana where she was Head of Customer Experience and use digital technology to modernize their customer processes. Charlon also has deep experience in the communications industry, with previous leadership roles at both Charter Communications and Time Warner Cable. Moving to the next slide, we take a closer look at our first strategic initiative. We have built fiber to record 185,000 locations this quarter. Our network team continues to steadily ramp our build, and our target a 4 million total fiber passings by the end of the year is well within reach. We're excited to continue to accelerate our build and execute on our plan to reach a total of 5 million fiber locations by the end of 2022 and 10 million locations by the end of 2025. Simply put, our network team executed well this quarter, and our fiber build plan remains on pace and on budget. Turning to fiber broadband customers on the following slide, we added a record 29,000 consumer fibre broadband customers this quarter, driving acceleration in our year-over-year fibre broadband customer growth to just over 5%. The overwhelming majority of our fiber broadband at this quarter was new to Frontier demonstrating our ability to win new customers. And we grew customers while growing ARPU 10% year-over-year. Part of this growth has come from customers choosing faster speed gears than they have historically. And we continue to see increasing demand for our one gigabit per second product. The changes to our pricing marketing that we implemented in Q3 are clearly resonating with customers and the market. At the core of our offering, we have a superior product to our competitors at a competitive price, with no activation or other hidden fees. And we put the customer experience at the center of everything we do. This strategy worked well in the third quarter, and it continued to drive strong customer momentum into the fourth quarter. Our competitive advantage is clear today. And we're excited to launch our symmetric two gigabit per second offering early next year, which will extend our competitive advantage even further. Even since our August announcement, that will be the first large fiber player offer two gigabit per second services in the United States. Several other fiber providers have followed with similar announcements about two gigabit per second services. And I'm delighted that others are following our lead in building Gigabit America. We take this as early evidence of our desire to innovate and lead and the fundamental superiority of fiber over alternatives. Customers will continue to want the fastest service possible, and we will continue pushing the industry's for these faster and better offers. On the next slide, we look more deeply into our fiber broadband customer base. We're committed to providing transparency on our penetration in both our base fiber footprint and penetration of each fiber expansion cohort as it reaches its 12 month anniversary. And our base by network penetration increased 30 basis points since last quarter. And the progress made this quarter by our new team demonstrates the impact of a more rational offering an agile marketing strategy and an improved customer experience. Our based fiber footprint serves as a template for where we expect to drive penetration in our expansion footprint. And we expect to steadily grow penetration to at least 45% over time. Our 2020 expansion cohort continues to show strong penetration of 30% of 12 month mark and as we said last quarter, while this 12 month penetration is encouraging, it represents a relatively small sample of just 26,000 locations. To the overall build plan, we continue to expect the 15% to 20% penetration rate at the 12 month mark and with penetration continuing to rise in subsequent years towards a terminal penetration of 45%. But our initial focus today has been on the consumer segment, we also have significant opportunities to grow our commercial business. Our addressable commercial market is over $8 billion with more than $5 billion coming from small and medium or SMB size business. The first step in addressing this is really to get the basics right with a compelling business-to-business offering. In a short space of time, we've taken three major actions to reset our strategy in the SMB segment. Firstly, we simplified our SMB offer into three speed gears and introduced a more rational market based pricing structure. Next, we renewed our channel strategy and introduced and improved channel partners with much stronger digital capabilities and lastly, we've done a full test of our lead generation activities to improve the quality of marketing. And taken together, these actions are already showing early signs of improvement. But we really have a long way still to go to further differentiate our business with best-in-class products, value added services, and industry leading partnerships to provide services such as business identify, theft protection, office productivity tools, managed Wi Fi and Gateway services. So please stay tuned for more updates here which we'll cover in future earnings calls. Turning to our wholesale business on Slide 14. We reached an important milestone by signing a multiyear strategic partnership with AT&T. AT&T is our largest wholesale customer, and we previously talked about our strategic decisions to reset pricing for our wholesale customers in return for future volume growth. This agreement positions us as the strategic partner of AT&T as they build their 5G mobile network, boosting connectivity between cell towers and their core network using our fiber infrastructure. As John mentioned, there are 23,000 cell towers within one mile of our fiber footprint. But we only penetrate a low percentage of these. There's an opportunity to grow our fiber to the tower business. And our new Network Agreement with AT&T is an important catalyst for this growth. Additionally, AT&T will use Frontier's fiber network to connect its large enterprise customers, where they have locations on our footprint. And despite its short term pricing headwinds, this agreement vastly improves the stability of our wholesale segment and positioned it for return to growth in late 2022 and beyond. Stepping forward to slide, our customer engagement starts with providing market leading products, and really the best sales experience. We're also committed to providing great service throughout the customer journey to create much deeper relationships and earn our customers loyalty. In July, we assembled an agile team dedicated to improving the customer journey. And we've already completed many actions and identified areas for further improvement. And as we've often said, there really is no single silver bullet to improve the customer experience. But it requires hundreds and even 1000s of small changes rooted in the attention to detail and determination across the business to quickly improve and remove these pain points. This team is systematically working through these improvements. And while it's just a small sample of them here, we've made simple get powerful changes to our app. For example, items like Remember me for car payments, and remember me for viewing their balance due. We've launched updated billing and payment flows to simplify our billing and payment experience and make it much simpler for our customers. And we've improved and refined our interactive voice response system with artificial intelligence powered call routing optimization. And we've eliminated customer pain points with items like removing transfer fees, and the process for returning equipment. Every single week, the executive team meets for two hours to review all aspects of the customer journey and build a clear plan with strong actions to improve the experience. Turning to slide 16, we're also focused on partnering with great companies to improve our customer experience. We've announced several important partnerships over the last few months. And I'm really excited about the improvements and innovations these bring. We partner with Red Ventures and expanded our digital channels to provide customers more options on how they want to engage with us, including more self serve capabilities, and chat functionality within our website and app. And we partnered with Arrow and Amazon Company to provide customers with the best in home Wi Fi experience. Advanced Wi Fi Analytics from Arrow enables customer reps to provide faster, better care or in many cases, the ability for customers to diagnose any issues and eliminate these without the need to call service at all. And lastly, we have a partnership with Nokia to connect homes to XGS-PON technology, which boosts network capability to give customers the best experience for high bandwidth applications like video conferencing, gaming and virtual reality. And as I said at the beginning, our new Executive Committee has only been in place for a few months, and has just begun to implement all of these improvements. So I'm really encouraged to see a number of early indications that our actions are starting to bear fruit. First and foremost, broadband churn across both fiber and copper customers continues to fall each down 20 to 25 basis points versus the third quarter last year. Churn tends to be higher in the first 90 days of a customer's lifecycle, and it is across the total base of customers. So early churn is an important metric that we track internally to measure customer satisfaction, particularly as we implement all of the improvements we've just discussed. 90 day churn is down 30% since the same period last year, and down 22% since March of this year, which indicates the changes we're making to the customer experience are driving real results. Touchpoint NPS, which measures the work of our customer care team improved 13 points since March of this year, and is now an all time high for the company. And we've delivered improved customer care whilst simultaneously rationalizing two call centers during the quarter. And since we launched Next Day Install that has resulted in a 15% reduction in cancellations between order and installation. So I'll now turn the call over to Scott to run through our third quarter financial performance. And our performance against our four strategic pillar of operational efficiency. Scott, over to you.

Thank you, Nick. And good morning, everyone. Before discussing our results, let me point out that in order to more clearly describe the performance of our business versus previous time periods, I will reference pro forma numbers in 2020 as if the first start accounting changes that we enacted when emerging from bankruptcy in 2021, had been implemented in January of 2020. I also encourage listeners to review our new supplemental package that is posted to the quarterly results page on our Investor Relations website, part of our effort and improve transparency for our stakeholders. Turning to results on slide 19, revenue was $1.58 billion in the quarter driven by roughly flat sequential data revenue, the lower voice revenue. We earned $126 million of net income and $587 million of adjusted EBITDA, $278 million of our adjusted EBITDA came from fiber products, which grew nearly 7% year-over-year, driven by strong consumer fiber broadband performance. We generated $603 million of cash from operations in the quarter, helping to add to our strong liquidity. Moving to Slide 20, our broadband customer performance was strong this quarter. Consumer fiber customers grew roughly 5% year-over-year, with a sharp acceleration during Q3. Business customer growth was flat year-over-year. SMB emerged as a key growth opportunity during our strategic review this summer, and early signs from the new initiatives that Nick described point to improved customer performance in the fourth quarter. Turning to slide 21, our total revenue declined 6% this quarter, a modest improvement in trend from the first two quarters of the year. Fiber revenue growth was flat year-over-year and improvement versus last quarter's 3% decline. Consumer fiber revenue growth was roughly 1% year-over-year, and improvement of 50 basis points versus last quarter. As broadband revenue growth of 15% was roughly offset by declines in video and voice. Business fiber revenue growth was flat year-over-year, also an improvement versus last quarter as our wholesale business gains stability as a result of the strategic partnerships that we have developed. It is important to note that while video generate significant revenue, it generates only minimal profit due to high content costs. We made the decision to stop marketing video to new customers earlier this year. While video declines will continue to be a headwind to revenue, we expect minimal impact on EBITDA. Copper revenue declined 100 basis points sequentially to negative 9% as both consumer and business faced continuing but expected pressures. Turning to slide 22, total EBITDA declined 12% this quarter, again as fiber growth was offset by declines in copper subsidies and other. Fiber EBITDA accelerated 800 basis points sequentially to 6.9% this quarter, driven by strong consumer fiber broadband growth and margin improvements that offset video voice and business declines. Frontier is a fiber first company, fiber now represents 55% of our adjusted EBITDA, excluding subsidies and other will increasingly drive the growth trajectory of the overall company. Copper EBITDA declined consistent with their expectations. We expect sequential declines to moderate over the next several quarters as our customer experience initiatives pay off. Our EBITDA has been pressured this year due to copper declines and our wholesale repricing actions. Next year our subsidy revenue will fall roughly $300 million as the cash to subsidy are retired. Even with this headwind next year, we expect growth in consumer fiber EBITDA and stability across our other businesses to drive a sequential acceleration in EBITDA by late 2022. We'll move to capital allocation on slide 23. The underlying cash flow generation of the business remain strong, excluding the CapEx associated with building fiber and reorganization and restructuring items, we generated approximately $400 million in free cash flow this quarter, and $1.1 billion in free cash flow over the trailing 12 months. Our Fit for the Future program remains on track to deliver $250 million of gross annual cost savings by 2023. We've already implemented several initiatives, such as closing two call centers while improving call center productivity, prioritizing and rationalizing IT spend and optimizing our trouble ticket rally and field operations. Last quarter, we announced that we were targeting $25 million of realized cost savings just this year 2021. And I'm pleased to announce that we've already surpassed that number and on track to capture more than $30 million of cost savings this year. We're committed to managing our balance sheet in a disciplined manner. And we plan to maintain a net debt to EBITDA ratio in the mid-threes in line with our peers. Finally, we are committed to rigorous capital allocation decision making. Our fiber build will be the primary focus of capital allocation over the next several years. And the build cost that we communicated to you last quarter of roughly $900 million to $1,000 per location from 2022 to 2025 remain unchanged, including the roughly $1 billion of debt that we raised in October, we ended Q3 with $2.2 billion in cash and $535 million in the available capacity on our revolver, representing roughly $2.7 billion of liquidity to fund our build plan, as well as normal operations. In addition to the strong liquidity, we also have ample balance sheet flexibility, our net leverage remained low at 2.2x at the end of the quarter, giving us ample headroom under our mid-threes net leverage target, and we do not have any significant maturities earlier than 2027. This maturity timeline provides us a clear runway during our Wave 2 fiber build. Additionally, as a result of the CapEx and our build plan, we do not expect to be a significant federal cash taxpayer throughout Wave 2. As I stated before, we will pursue a discipline financial policy that will enable us to manage the range of economic scenarios. We are also reiterating our 2021 guidance today; we continue to expect capital expenditures of roughly $1.8 billion. Although, we may come in slightly below that level, due to build costs at the low end of our Wave 2 reach. We're also maintaining our full year EBITDA guidance of $2.4 billion to $2.5 billion. We expect results to fall within the upper half of the range due to stronger than expected broadband performance and cost savings generated in the third quarter. I'll close by bringing the Frontier investment thesis all together. First, there's a strong and growing demand for fiber driven by expanding household data consumption. As new use cases emerge, these trends will only accelerate. Fiber is the superior product for a number of reasons, including symmetrical upload and download speeds that far exceed cables capability, lower cost of ownership driven by fiber's passive technology, and lower latency levels that enable important uses, like video conferencing and game. We operate within a favorable market structure. As you recall, we only have one or no competitor in 86% of our markets. As you think about fair share penetration, we believe that 45% to 50% with a superior product is well within reach. We have a clear strategy and purpose. We're building Gigabit America to connect Americans to the digital economy. We have ample liquidity and a strong balance sheet, providing us with access to capital to fund our strategy. Lastly, we've attracted a strong and experienced leadership team who are singularly focused on executing our four part strategic plan. Spencer, please open up the line for questions.

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

Our first question comes from Brett Feldman of Goldman Sachs.

Great, thanks so much for taking the question. Just a few, it was interesting that you highlighted that most of your fiber net adds are actually new relationships to Frontier. I was hoping you give us some insight into where you're weighing customers from the extent to which you're getting converts of households moving off of cable, versus maybe just doing a good job winning jump balls when you have someone moving into a new location. And that was also great to hear the update around all the work you've been doing to improve the customer experience. I was hoping you could also give us an update on where you are in terms of evaluating your branding strategy going forward. Thank you.

Yes. Hey, Brad, it's John Stratton. So thanks for your questions. And maybe Nick and I can double team, may be just to start, we mentioned some time ago, that when we describe our results, we're often going to always going to explain not only how we did overall in terms of driving fiber broadband net adds but where they come from, and specifically, how do we balance between moving our penetration ever further up in those markets that we think of as the core that is to say places where we have that three plus million legacy fiber passings. And then how are we doing penetrating the new fiber? And I think your question gets right to that, on the first part of that penetrating further in the existing markets is really, I think, in my mind an excellent way to demonstrate our ability to take share in those markets where we and our competitor have stable mature platforms. And so this is something we focus on a lot. If we can effectively compete there, of course, it bodes well for how we'll do in the new markets, but maybe Nick, if you can talk a bit about gains in terms of the mix of new customers new Frontier, and also just the combination of that and the work that you've done with the team on improving the customer relationship and delivery service, et cetera, and how does it affect

Yes, thanks, John. And thanks Brett. As we said, in the discussion, we've really put a lot of effort in to improving our offer both in terms of attractive on ramp pricing, a more attractive end-to-end proposition with things like the launch of the Arrow partnership with Amazon, which gives us a really winning in home Wi Fi experience, coupled with much greater promotional activity, which really draws to attention the fact that we have a superior product, and indeed a product that does what cable can't, which is our kind of slogan we've been running with, recently, that I think has increased attractiveness, to all of the potential sources of new customers, whether that's converting copper to fiber customers, where we built new fiber, winning from cable, and indeed, even our own customers upgrading to higher speeds, which is also what we're seeing as a measurable trend across the base right now. So I think its growth coming from all of those sources that really rooted in a fundamentally more attractive proposition. Now, I don't want to overstate that work is completed is very fast and complete. Because the team that's been doing it, is really only been there for a few months, a quarter at most, and many of them much less. So this is really very much early green shoots, rather than us declaring victory, and much more work still to come on that. But the goal is to make us more attractive across all the segments, and therefore all of the sources of growth for us. Your question on brand, I think we're getting it into early week, one way we anticipated a lot. As we said, at the last quarterly results, we were evaluating all of the options that we do with the brand, whether we double down on the Frontier brand, we change it somehow, or we completely reinvent ourselves with a new brand. But always with the belief that brand is what a brand does. And therefore the vast majority of our effort is going into changing what we do to customers, because that really is the core and the very essence of our brand and much more than the logo and the sort of stuff you see on bills and on the side of trucks and so on. That said we are currently in deep research on the future parts of the brand with more than 1,200 interviews completed already across five different states. We're beginning to form our hypothesis on what is the best, most efficient value creating route for us to take with brand evolution. And I anticipate coming back to our board in the next quarter or two with a firm recommendation on how we'll take that forward. And of course, once that decision is made, we'll share it with you and one of these results.

Our next question comes from Jonathan Chaplin of New Street Research.

Thanks, guys, the comments that you've made on the superiority of your product and cable, I think it's probably well understood by everybody on this call. But it's not clear that the consumer market understands that as well as we all do, and for the launch of the two gigabit product next year, I think will be exciting in that regard. And I'm wondering, when you launch that product, are you going to keep a three tier structure with two gigabit per second at the top and maybe a gigabit as your flagship product and move up to the low end as well, or you're going to put it in as a fourth tier that sits above your current features?

Jonathan, I'm going to give Nick a chance to think about how he best not answer that question, given its competitive sensitivity, but we'll know -- we'll come back in a minute. But just one thing we were talking about a little bit earlier this week was -- there's two ways to think about the superiority of the fiber product. And certainly our ability to move very quickly to a two gigabit offering is a point of great differentiation at the top of the stack. But one of the things that we also talked about just yesterday, if you take our entry level price point, which is remarkable value on our 500 Meg service, you can't buy that service for any price from our competitor, in that it is 500 down and 500 up. And people I think are beginning to recognize that's a pretty important dimension to their broadband experience. And I think as we think about the continuing momentum that we're building from a subscriber gains perspective, starting to get that recognition and consumer side, but I'm sure you're not going to want to portray anything that senses commercially, but it talks about the two gigs, how you see the market developing?

Yes, it's a great question. Thank you, Jonathan, and John, as well. But I think in essence, Jonathan, your point is well made in that consumer awareness is not as great as I would like it to be of the benefit of our symmetric fiber network. And that's been part of the job that I've given our new marketing team to go fix. That's why we're doing the brand research. That's why we're simplifying our product and doubling down on a core customer message, which begin to emphasize that what we're learning is that actually the pandemic has been extremely useful to educating consumers on two things. One is this reliable, high speed connectivity matters. And secondly, for the first time, I think they understand that symmetrical speed also impacts their experience, together with latency for the sort of growing gaming community. And I've got that evidence, as you may recall, by the fact that our upload traffic during the pandemic increased by the same amount in that short period of time, and it did in the entirety of the preceding five years. So it's very clear that consumer behavior is changing. And as it changes, so their understanding change, and our job in marketing and branding and marketing communications, is to double down on that product benefit. And make sure that people really understand how it improves their experience, their lives, their jobs, their entertainment, their interactions with friends, and family, and so on. So we've started in that direction, more work to be done. I think on we've done good work, I hope on simplifying our offer down to two core offers an on ramp 500 Meg offer and a core one gig offer, we're going to augment that with a two gig offer. But remember, our network is already 10 gigs capable. And so we can carry on driving up speed to as demand requires in a very low cost very quick way, again, in a way that cable can't. And I would like us to have a speedy price ladder that really does let people find their own sweet spot for what they use in their house. And as that demand continues to grow, gives them an easy upgrade path, which of course, delivers a better experience for them and higher offers we brought. So I think you should expect us to see continued stretching of the speed ladder. And over time we'll add various value added services as well but we are going to keep those under wraps until we launch them.

Our next question comes from Phil Cusick with JP Morgan.

Hey guys, thanks. Three quick ones, if I can. First any supply chain issues, or as Veronica gotten ahead of this enough? Second, we've seen some over build is actually accelerating to get ahead of your fiber construction. Can you remind us where's the competitive overlap today? And have you dug deeply into how that's going to ramp over the next couple of years? And has that impacted your build plans at all? And finally, can you quantify the wholesale revenue hit we should expect in the fourth quarter from the AT&T deal? Thank you.

Yes, hey, Phil, it's John. So maybe if we can ask Scott to take the first and the third of those questions on supply chain, and then on the wholesale impacts would be good and maybe we take that middle question.

Yes. Phil thanks for the question. So I think we continue to ramp up as expected, as John noted, we're on track on time on budget and supply chain. Clearly with a build of this scale will have issues from time to time but we've done really three things to help mitigate those issues. First, as you noted, we have a world class team led by Veronica that is very much in the details, and very much looking ahead of what and putting in place a risk mitigation strategy. So we have a great team. We, earlier this year ran a very rigorous procurement process to expand our pool of suppliers for both labor and materials. And that really resulted in a more diverse supplier base where we have less risk on individual supplier and individual contractor. And we ended up signing multi year agreements with most of those suppliers to secure supply and lock in pricing. And in addition to that, where we've strategically needed to we bought ahead on key inventory items, particularly network electronics, so we feel good about the supply chain ramp up. It's something we're watching closely. We'll continue to monitor and keep you all updated. So that's supply chain. On the last question on wholesale; we haven't quantified the specific wholesale headwind, from any specific customer. Other than kind of reiterating our total guidance for the full year, which implies Q4, where we said we'd end up kind of in the upper half of the total EBITDA range of 2.4 to 2.5.

Yes, Phil, Nick here. On your second question over builders. The first thing to say just to kind of take a step back, is the fact that there are over builders is a really positive reinforcement and our belief that that fiber really is the superior digital infrastructure this country needs and that capital and that operators there. So in a sense, it supports the overall industry thesis for growth, in terms of do we adjust our build priorities to reflect that? The answer is very simply, yes, we have an extremely detailed and fully integrated build model, that actually Scott and his team and our marketing teams maintain together, which lets us adjust where we build on the pace of build according to many variables; competitive intensity is an important one of those. But it isn't just about adjusting our builds. We also very dynamically adjust our marketing, pricing, go-to-market effort, channel effort, and so on. And our new partnership with Red Ventures is extremely useful in facilitating that because it lets us be much more digitally agile, in terms of where we target and what propositions we target with to do active AB testing on a very localized basis, and simply move faster in the competition. So it's about dynamically evolving our build model, and in a very agile way, adjusting our go-to- market strategies to make sure that we send a very strong message to over builders, that if you want to start here, fine, but you'll be fighting with us and there'll be a difficult fight. So please go somewhere else.

Have you forecast where the rebuild numbers going to look like in a couple of years?

Yes, we have.

Hey, you care of sure.

No, I don't. You'll understand to pick stuff.

Our next question comes from Greg Williams of Cowen.

Great, thanks for taking my questions. I'd like to dovetail the conversation about the speed gears into your ARPU growth. Looks like it was up 10% in fiber broadband ARPU, how many subscribers are taking the one gig plan. I imagine it's fairly small, but it sounds like you're going to start to lead with the one gig plan, which is from what I understand on $80 versus the 500 Meg plan at $55. And what's the take rates of that and your gross adds balance for that plan, or maybe qualitatively how durable or sustainable double digit ARPU growth in that area? Second question is just on the Wave 3 assets, you've spoken in the past that, they could be possibly sold. And you're waiting to see the infrastructure bill and the calculus to that. So what really has to happen? Is the bill need to get passed? Or do you want to see how the states will dole out the dollars? Are you having conversations on selling those Wave 3 assets? Thanks.

Yes, hey, thanks. I'll start it's John, on just the Wave 3 stuff, I think it's sufficient to say that that's sort of a work still in process. And so we have a high sense of urgency, we recognize that we want -- we don't want this to be an overhang in any way distraction for a management team, or anyone who's thinking about the company. But it's a bit more work to do there in that it's a mix of properties. It's a mix of conditions on the ground, and financial calculation about the investment thesis. And the nature of potential actions going forward is more broad. So for example, when we talked about Wave 1 and 2, what we said back in August, was that that was a clear, compelling, no doubt about a tenures back and go, kind of a message that we were able to deliver both externally and of course, internally to our teams to go and build it, a bit more work to do to sort of work our way through value capture and creation in Wave 3. So that's underway, certainly, to your question, federal or state level of subsidies and different programs that may come through in the various infrastructure bills are important to the calculus, it could shift some of the breakeven points on some of those investments. But it's not the only factor. There's a bit of sort of business strategic development that needs to accompany that effort as well. So we'll be ready to talk about that in the next couple of quarters. We're not ready to give you anything more here today. But maybe Scott, let's take the first piece about ARPU growth.

Sure. Greg, on ARPU growth, so our ARPU increase was really a result of a mix of factors, including the price and offering rationalization that Nick mentioned, as well as the speed up carrying that you discussed. You start with, we now have the entry level price that's highly competitive with any other offering, and it's much faster and its upload speeds. Then, on the one gig offering, we've said we're very encouraged by the number of customers, particularly in the expansion markets who are choosing the one gig offering, which shows that the value that offering has, particularly as we win new customers, that has been a nice growth to ARPU as well. So we expect continued uplift from both the one gig offering and normal price offering rationalization that we discussed.

Our next question comes from Frank Louthan of Raymond James.

Great, thank you, and walk us through the agreement with AT&T for the backhaul and what that gets for you. And how does that fit with their announcement with OneWeb to use LEO satellites working backhaul in some more remote areas, is that depends any sort of conflict they are not going to follow up?

Yes. Frank, great question. Thank you. We're super excited about the deal with AT&T. We, kind of headlines that we were resetting our wholesale pricing which would create some headwinds. We talked about that in previous quarters. And the goal was to use that as a mechanism to reengage with the wholesale market, win some new contracts and begin to grow share again. And that's exactly what this very significant deal with AT&T who is our largest wholesale customer; there are really two components of that deal. The first of which is high speed fiber connectivity to their cell sites as they upgrade to 5G and therefore have more data to carry back to their core network. And the second component is AT&T using our fiber network to connect some of the enterprise customers where we have strong connectivity and perhaps they have less so really important contract and two core components. As it relates to Leo and anything that AT&T to do with them, I think, well, first of all, that's really a question for them rather than for us. But I would just say that Leo and high speed terrestrial symmetric fiber are very different proposition. I mean, one is very low latency, very high speed, and terrestrial fiber. That's the deal that we have with AT&T and low earth orbit satellites, as you know are much higher latency, lower capacity, great for reaching sort of more remote rural areas and so on, but not really the game that we're in.

Right, great. And then and so follow up, your CapEx came in a little larger than what we were looking for, but you maintain the guidance for the year. I know you guys are incentivized on getting the build done, walk us through how that's changing and how you're going to hit that CapEx target for the year.

Yes, sure, Frank, this is Scott, we do expect a large increase in CapEx in Q4, given the acceleration of the build plan that we have going into 2022. So a lot of the CapEx that we expect in Q4, which will be a significant step up is for locations that won't be open for sale until 2022. Either because we will have already started the work on those locations, or we purchased materials and electronics. So as we ramp up our build and open for sale locations, you'll typically see CapEx ramps up a quarter or two ahead of that. So that's the dynamic going on in the third and fourth quarter year in advance of a much bigger build year in 2022.

Our next question comes from Matthew Harrigan of Benchmark.

Thank you. One more or less Davos type question. And then one prosaic question, I think at that European Telecom Association and different consultancies are really highlighted just how much value fiber adds to the economy. And most of the value is appropriated by some of the large tech companies, when you look at the development of applications for fiber, the type of speeds, you have the headroom to deliver, and can you see in a ways over time to participate more directly in the economics, maybe in a non traditional manner. And then the second question is I realize you don't have a non aggressing path with AT&T, and you can't speak for AT&T. But given your relationship with the wholesale side, which is great. Is it kind of reasonable to infer that maybe they wouldn't be as incentivized to build fiber in your areas, because somewhere their needs are addressed already? Thank you.

Yes, hey, that's John. Just quickly on the second question, probably a better one for AT&T what they intend to do and where they intend to do it, we're really quite pleased with the new agreement that we have to provide fiber conductivity for them in our footprint. But beyond that, it's probably inappropriate for us to speak to their intentions. In the first part, it's a really insightful question, this question of where does value become generated by the delivery of these high broadband networks? And how the telecoms participate in that in a meaningful way and what gets sort of shut off to the technology companies that maybe are delivering the applications and such, it's a virtuous cycle. And what I would tell you is that if there weren't those applications created by those technology companies to drive what has become an insatiable bit of demand on the part of American consumers for all manner of things in the spirit of high definition video and high intensity gaming, all of these different applications then draw demand. Today, we have people are saying, well, why in the world would I need to get that echo is something I heard 5, 6, 7 years ago? Why do I need 100 Meg, you need it because of the things that you'll be able to do. And in our minds, when we lay out our investment thesis, and when you look even at just Wave 1 and 2 which were driving very, very aggressively, the value creation we provide to our shareholders on the realization of those plans is remarkable. And it's enormous. And it's an incredible shift from where the business has been. And these are, then assets that are returning at a very high and strong level. So we feel very good about our position in the value chain. Look, Nick, as you referenced before, will speak to in the moment as we release different products and services that may layer on top of our networks, up the value chain. But we'll talk about those as they come but we don't think about this as sort of a zero sum game. It's a very healthy ecosystem that creates demand that demand isn't satisfied are increasing level to deliver bandwidth.

Our next question is from Nick Del Deo from MoffettNathanson.

Hey, good morning, and thanks for fitting me in. First, could you comment a bit on the sort of competitive responses you're seeing from cable when you upgrade to fiber and their markets? And second, can you talk a little bit about the share of gross adds you think you need to win to reach your target penetration rates? And the degree to which launching fiber and markets stimulates switching considerations? And I guess talk about a little bit, I'm interested in how you think, if the current suppressed move environment persists, what sort of impact might that have on either your ability to penetrate markets over time or your cost to acquire subscribers?

Yes, Nick, when I think about, I'm going to just touch the last part of your question and ask Nick to do most of the heavy lifting here. When I think about that last part of your question, though, the move thing has always been a catalyst of gross activations in the business, and particularly, of course, when it's a physical move out of one market into another, it's an entirely new arrangement, entirely new relationship. But really, what we've seen over the years is that the move is actually just breaking inertia. It's a catalyst for change, right? So one has to change. What we're seeing more and more and more and this is something I think is only going to continue to increase is that as customers look at their monthly bill, and they think about their triple play, that they're paying serious money for. And part of that triple play being the 500 or more channels that they subscribe to, through typical cable networks, the linear video proposition, and then they step back and say, well, what am I actually watching? And how much time am I spending watching network based content, as opposed to the various IP streaming services that I also subscribe to, and they realize I'm paying too much. That's creating a moment of truth that is something we really enjoy. Because as we think about our essence of our value propositions as we go forward, it's a broadband provider. And so the ability for us to make that clear to customers, you really should think this over, there's an opportunity for you to reconsider how entertainment is delivered, that creates a stimulus for change, as well as impacts how we plan to compete in all these markets. But Nick you want to talk more about the balanced of mix stuff like that.

Yes, I'll talk a little bit about competitive response maybe and switching considerations, and perhaps Scott with capacity for that kind of growth as needed to maintain so. Let's start with switching behavior because this is a very interesting one for me. And it's interesting, because I have recently been able to get out on the street with our team building fiber connecting. And in fact, I connected my very first fiber customer myself just a couple of weeks ago. And I'm going to do some more this afternoon in Florida. So I see this switching behavior up close, first hand. And I think two very interesting things. The first of which, actually three, the first of which is that, where we bring fiber to an area that's currently got low speed, copper, DSL, people are literally craving to get hold of this product, they have really been held back from participating in the digital economy, from enjoying all of the things that perhaps we on this call take for granted for many, many years in some cases. So I've seen entire street literally lit up with telling each other that our product has arrived. And then the neighboring street, the first thing they do is write to me and saying, can you please put it in the street next door, bring it to us? We want it. I see that every single week. And I think that is what you're seeing reflected in our penetration rates from our early build cohorts which are higher than we've anticipated, although we do anticipate the 15% to 20% penetration in new cohorts as we've previously said. So that's the first thing. The second switching behavior that we see very noticeably is from cable where there's an increasing realization, as John said that integrated content and connectivity is yesterday's model. Because people already have Netflix, they already have Amazon, they kind of asked her why do I -- why do we need to pay for this linear content because no one ever looks at it anymore. And then the penny drops that they're paying above market rate for an inferior product. And I don't think people like doing that very much. And then the third one, just to round that out is I do get people emailing me from all over the country, encouraging us to adjust our build model in their favor to a reference earlier question. So we do take notice of that because we want to go to where demand is. And we're finding that all over the place. In terms of competitive response, still muted, I think, is the headline, we've got to bear in mind that whilst we build aggressively and are very pleased with the progress we're making on selling, we're still relatively much smaller than our primary cable competitors. So they are going to have to be very mindful about how they react to us, because it's potentially more expensive to them to react or not react. And that's why I think we're seeing a muted response. So it's something we watch very, very closely. We watch it city by city, street by street, and there are definitely variances across the country. But as I said earlier, much as with the over builders, we're kind of on it. So that we -- our radar picks up the early indicators, and we swoop fast to counteract any competitive moves. And that will, I think, be one of the things which hopefully keeps us competitive in coming courses as well. Scott, the question on growth adds?

Yes, sure. Nick, on the share of gross adds; I'll break into buckets of base and expansion. So in our base, we're clearly targeting 45% terminal penetration over the long term. So over the long term, we would expect to win more than 45% of the gross adds to be able to hit our targets and expansion. We have a bit more time to ramp up to that 45% plus number because of the kind of penetration curve in the first several years but we would expect to be above that 45% share of gross adds once we reach the terminal a year.

Operator, please conclude the call.