FYBR - NASDAQ

Welcome to the Frontier Q1 2022 Earnings Call. Please be advised that today’s conference is being recorded. I’d now like to hand over the conference to your speaker today, Spencer Kurn, Head of Investor Relations. Thank you and please go ahead.

Good morning and welcome to Frontier Communications’ first quarter 2022 earnings call. This is Spencer Kurn, Frontier’s Head of Investor Relations. And joining me on the call today is John Stratton, Executive Chairman of the Board; Nick Jeffery, President and Chief Executive Officer and Scott Beasley, Chief Financial Officer. Today’s presentation can be followed within the webcast and is available in the Events and Presentations section of our Investor Relations website. Let me now refer you to Slide 2, which can change our Safe Harbor disclaimer and remind you 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. In addition, during this call, we will refer to certain non-GAAP financial measures, which are defined and reconciled in our earnings presentation, press release, and trending schedule. With that, I will turn the call over to John.

Good morning, everyone and thank you for joining today’s discussion. Our business remains well positioned to win in key markets and we continue to execute on our unique opportunity to create significant shareholder value. We have a solid foundation of fiber assets, a significant customer base and strong competitive positioning. In the last 12 months, we generated $6.2 billion of revenue and $2.3 billion of adjusted EBITDA, which represents a 37% adjusted EBITDA margin. Driving this performance are 2.8 million broadband customers across both consumer and commercial businesses. As we have said before, fiber is the future of Frontier. $1.1 billion of our EBITDA in the last 12 months has been generated by our fiber products and we are investing to grow our fiber EBITDA rapidly. We now 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 in-footprint opportunities. It’s now been about 1 year since we emerged from bankruptcy. And so it seems a good time to step back and review why we believe Frontier is one of the best investment opportunities in the market today. And first and foremost, we operate in a very attractive industry. Our industry thesis is underpinned by the explosive growth of data consumption that we have seen over the last two decades and which is expected to increase threefold between now and 2025. And we are seeing this demand in real-time across our network. In March of this year, our average fiber broadband customer consumes 900 gigabytes of data, representing an increase of over 30% versus pre-pandemic levels. And a substantial and growing portion of our base is consistently consuming more than 1 terabyte of data every month. Against the backdrop of exponential growth of data consumption in the coming years, fiber is absolutely critical to meet market demand. Fiber’s performance is vastly superior to cable and wireless alternatives today, providing faster download speeds, orders of magnitude faster upload speeds and significantly lower latency. Fiber networks provide a clear, low cost path to delivering broadband speeds to 10 gigabits per second with minimal additional capital investment. And most critically, fiber has the best economies of scale of any technology as data throughput and consumption increases across networks. The business is in our sector with similar characteristics, favorable market structure, high operating leverage and dependable long-term growth have tended to deliver attractive returns deserving of high multiples. And we have seen this theme unfold over the past 20 years, first with towers, then data centers and then enterprise fiber. But we believe fiber-to-the-home is the next frontier of this continuum of exceptional infrastructure investments. And within the investable universe of fiber companies, Frontier is excellently positioned. We have the second largest announced fiber build of any company in the United States through 2025. We are uniquely advantaged to execute on our fiber build with an early-mover head start on the industry, an incumbent position that affords both speed and cost benefit and a vital purpose, Building Gigabit America that is wholly aligned with the goals of the federal government’s $42 billion funding for broadband infrastructure. This time last year, just after emergence, during our first quarter 2021 earnings call, we have provided an illustrative example of our company’s potential valuation. Using the same widely published industry benchmarks of value per premise passed and at the midpoint of $3,000 to $4,000 per fiber passing and $300 to $600 per copper passing, our business today would be worth just under $20 billion. And as we march towards our Wave 2 plan to build 10 million fiber locations by 2025 our enterprise value stands to rise materially using the same midpoints to roughly $38 billion. Upon reaching this stage, fiber would represent over 90% of our enterprise value. Simply put, we are the largest pure-play fiber-to-the-home investment opportunity in the United States. Now, based on these industry benchmarks, our current market valuation implies a meaningful discount to what we are worth today and an even more substantial distance to what we will be worth. But as we have said since our earnings call last April, as a company that recently emerged from bankruptcy, we are a show-me story and we understand the need to objectively demonstrate our ability to execute against this opportunity. And this underlies the importance of our commitment to transparency, which I referenced on Slide 7. We outlined our goals for you at our Investor Day last August: 10 plus million fiber passings by 2025, Wave 2 steady-state terminal penetration of 45%, with $4 plus billion of adjusted EBITDA and EBITDA margins in the mid to high 40s. And we are committed to showing you how we are doing as we go, providing enhanced disclosure by splitting out our fiber-based network from our new build and reporting penetration of both the legacy base and our new build cohorts every quarter. And this is a turnaround story. It’s not complicated, but it does require fundamental execution as we build a strong and durable foundation for growth. Attaining and sustaining total revenue and EBITDA growth is our most critical milestone. And as we have said, we will generate both in 2023. Achieving this requires us to hit a series of seven key inflection points along the way. It starts with scaling the fiber build. We doubled our build rates by second quarter of 2021 and it has continued to scale rapidly since then. Look for us to roughly double it yet again by the end of this year. Next, we needed to scale the pace of our fiber net add generation, which we did in the third quarter of last year and this in turn drove two other milestones. We now have more consumer customers on fiber than on copper and our total fiber EBITDA has also eclipsed our copper EBITDA. Our net adds acceleration continued into the fourth quarter of last year and for the first time, outpaced our copper declines allowing us to achieve our next inflection point, total broadband customer growth. These operational milestones, which we have already achieved and our continued momentum, will soon power positive inflection in our key financial metrics. We expect to generate sequential EBITDA growth for the total company in late 2022 and year-over-year revenue and EBITDA growth in 2023. All of this demands a relentless focus on our four levers of value creation: fiber deployment, fiber penetration, customer experience and operational efficiency. Nick and his team have been unwavering in their pursuit of these critical priorities and have built strong momentum in the business. I will now turn the call over to Nick to review how we performed in the first quarter. Nick?

Thanks, John. In Q1, our team executed extremely well against our strategic priorities. We built a record 211,000 new fiber locations. We also added a record 54,000 fiber broadband customer net additions, which is over 20% higher than the prior record we set last quarter and a fourfold increase over the same period last year. Our fiber net adds continue to outpace our copper losses this quarter, resulting in 20,000 positive total broadband net adds, which is 2x higher than the prior record we set last quarter. We gained momentum in business and wholesale, reaching a key inflection point in SMB and we made progress improving our employee engagement. And last week, we unveiled our new Frontier brand. A year ago, we said we will take a long and hard look at our brand and its future and after a thorough data-driven evaluation I am delighted with the results. Our new brand is modern, more relevant, more tech-oriented, and reflects our commitment to relentlessly being better in our business and for our customers. Moving on to our first strategic initiative, fiber deployment on Slide 11, our fiber build continued to scale to another record quarter, passing 211,000 new locations. Our build speed was impacted by COVID-related delays in January and February. Once they subsided, we scaled our build rapidly, passing over 100,000 locations in March. This rapid scaling puts us on track to achieve our target of at least 1 million locations with fiber this year. I am particularly proud of our team’s strong execution in accelerating our build in the midst of supply chain and COVID-related disruptions. Our early and rigorous focus on supplier diversification, cross-functional planning and cost control has really paid off in meeting our build and cost per passing target in a highly challenging environment. I remain confident in our plan for passing 1 million locations this year, an acceleration to 1.6 million locations in 2023 and our long-term plan to reach 10 million plus locations by the end of 2025. On the next slide, we will move on to our second strategic initiative, fiber penetration. Our team has been hard at work over the past year to make significant improvement in consumer broadband. We streamlined our product offering to three clearly defined tiers designed to provide the fastest speeds, best value and unmatched performance. We enhanced our core broadband product with value-added services like eero Wi-Fi, YouTube TV and DIRECTV STREAM to release critical pain points with our customers. We established cutting-edge digital customer acquisition capabilities through our partnership with Red Benches to enhance our acquisition funnel. And something I will cover in more detail in a few slides, we launched our new brand which will add fuel to all the underlying improvement that we have implemented so far. Our hard work is paying off, as demonstrated by our third consecutive quarter of fiber broadband net adds. We added 52,000 consumer fiber broadband customers this quarter, driving an acceleration of our fiber broadband customer growth to 11% year-over-year. On Slide 13, we look more deeply into our fiber broadband customer base and we show that we didn’t just gain customers by deploying fiber into low penetrated market, but we also gained customers in our mature fiber market, what we refer to as our base fiber footprint. In our base fiber footprint, penetration increased 50 basis points sequentially to 42.4%. And our base fiber footprint serves as a target for where we expect to drive penetration in our expansion fiber footprint and we expect to steadily grow penetration to at least 45% over time. In our expansion fiber footprint, we are also making excellent progress. At the 12-month mark, our 2021 build cohort reached penetration of 18%, consistent with our target range of 15% to 20%. And at the 24-month mark, our 2020 build cohort reached penetration of 44%, significantly outperforming our target range of 25% to 30%. As larger builds are pulled into our 2020 cohort throughout the year, we continue to expect penetration of 25% to 30% at the 24-month mark. I’d now like to move on to our third strategic initiative on Slide 14, the customer experience. We have made enormous progress on transforming the customer experience across all aspects of our company over the last year. We made billing simple and easy to understand, paperless and introduced an autopay discount to encourage customers to use this easy future. We streamlined our IVR, automated SMS and e-mail communications, and introduced an array of self-help tools. And we have implemented initiatives like next day install and automated equipment return to make our customers’ lives easier. These initiatives delivered another quarter of stellar goal. Our fiber net promoter score continued to increase sequentially and remains at least 30 points up since the same period last year. Importantly, newer customers have higher NPS scores than longer tenured customers, which suggests that our overall NPS scores have significant upside to grow as our customer base expands. Broadband churn across both fiber and copper broadband customers also continued to fall to record lows. 90-day fiber churn, which tends to be higher than it is across the total base of customers declined to 16% since the same period last year, which indicates that the changes we are making to the customer experience really are driving results. Lastly, call center volumes were down 20% since the same period last year and care volumes specifically were down 23%. This demonstrates that our improved service is resulting in fewer complaints, fewer reasons why a customer would call, which leads to higher satisfaction levels at a lower cost to serve. While these results are encouraging, customer care is a journey of continuous improvement for us. We are constantly refining, automating and simplifying our processes for interacting with customers and rigorously measuring our progress as we go. Turning to Slide 15, we have also made significant progress improving our Business and Wholesale performance and this quarter marked a critical turning point for SMB. Over the last few quarters, we have implemented a series of improvements that have truly revitalized this segment. We have strengthened the product with our 2-gigabit offering and recently announced partnership with RingCentral. We have enhanced our demand generation with tailored marketing campaign and we have expanded our sales channels fourfold with best-in-class door-to-door and outbound vendor relationships. We have implemented a CRM platform, which optimizes sales operations and customer management and we have installed robust analytics to predict churn and drive higher retention. Together, these actions have driven a number of key inflection points in SMB over the last 6 months. Our fiber broadband gross adds have doubled, our fiber broadband net adds have increased sevenfold and our fiber broadband ARPU is up 2%, demonstrating customers’ willingness to pay higher quality connectivity and services. That said, we still are in the early days of achieving our aspirations in the SMB market. This segment was not a focus of the old Frontier and our penetration in SMB remains significantly below the levels we see in consumer. However, we have put in the hard work to drive these critical inflection points in this business and the momentum we generated this quarter is encouraging as we address this largely untapped opportunity in front of us. On Slide 16, I will shift gears in something that’s really important to me, our company culture. When I joined Frontier a year ago, the culture was broadly broken. Employees were minimally engaged, the job lacked purpose and morale was low. We set out to build a new culture and define key elements of this within The Frontier Way, which centered on earning customer loyalty, getting things done together, doing what we say we will do and creating the future. And we have rapidly introduced new ideas to cultivate these elements and build them into our corporate culture. For example, we started company-wide town halls, which we call Listen Live, where along with the executive team we openly discussed our progress in the business and answer questions from employees. We have invested in employee training and formed our Leadership Academy and we have implemented a new culture of performance management to recognize high performance. And finally, we strengthened engagements by launching a number of initiatives to get suggestions directly from employees on how we can make Frontier better. Two examples include a cost reduction program that more than doubled our initial goal of $20 million in savings and an initiative to eliminate bureaucracy throughout the organization called Eliminating Dumb Policy. On the next slide, it’s clear that these initiatives have driven measurable improvements to employee engagement. Every 6 months, we conduct a People Pulse survey, which is a survey that spans across all of our employees, is completely anonymous as administered by a third-party. Over the past year, the survey shows that the share of employees with overall positive employee sentiment is up 20 percentage points. The share of employees be able to work gives them a sense of personal accomplishment is up 17 percentage points. And the share of employees who see a clear link between their work on Frontier objectives is up 26 percentage points. These results are still far from where I wanted to be. But the trajectory resulting from the improvements we’ve made is clear, and we will continue to build on this momentum in the years to come. I’ll close with the exciting topic of our new brand that we unveiled last week. Over the past year, we’ve evaluated our brand through a methodical, data-driven process. Our research expand quantitative and qualitative surveys over 12,000 customers to understand brand perception, brand tracking and paths to purchase. We performed deep died ethnographies with over 20 customers to observe their behavior and interactions to close up. We tested the brand positioning, creative and visional resonance across more than 4,000 customers. And we tested our culture and community exploration across more than 50 stakeholders. We found that while our brand reputation struggled in some copper market, there was a growing and positive equity in the Frontier name and brand in fiber market, and a high customer sentiment and tremendous employee affinity and loyalty. And this is critical because we know that our future is fiber and fiber customers are the ones that will drive our growth in the years to come. Now I strongly believe that a brand is what a brand does. A new brand simply doesn’t change customer’s perception on its own but we are working hard change what we do and drive transformation from the inside out. Over the past year, we’ve improved our product, services and value proposition with a dedicated focus on improving our customer experience. And I have a strong conviction that these changes have resulted in improved customer validation. Our fiber penetration is accelerating with win shares up 13% over the past year. Our loyalty is improving with the second sequential quarter of record low churn and established a clear trend in rising fiber NPS, resulting in another record high this quarter. So clearly, we’ve made progress in changing what we do and we’ve generated the underlying momentum that supports a new and exciting brand reinvention. Our extensive research on brand in conjunction with the strong customer validation that we’ve seen in response to the underlying changes we’ve made, guided our decision to keep the Frontier name and reinvent the brand into one that is more modern, more relevant, more tech-oriented and with wider appeal. So I’m pleased to share with you our new brand and visual identity. Our new logo is an iconic round or representing an inclusive connected nation and symbolizes the speed and capabilities that we bring to customers as we build Gigabit America. Our new type phase is big and touchy, reflecting our bold aspiration. And our vibrant color scheme represents the ambition, expertise and celebration of the future we’re building. Following the brand launch last week, we rolled out a new advertising campaign that showcases our revitalized brand and new industry-leading claims. Our new campaign is eye-catching. The messaging is bold and crisp. And it encompasses who we are, a fiber company that’s creating the future with our customers. And to emphasize our visual identity we were recently verified by the independent third-party Ookla, and having the fastest Internet in L.A. and the fastest Internet in Florida, so now begin sharing these claims with our customers. Our reinvented brand adds fuel to the changing customer perceptions that we’ve begun to ignite. Our initial response has been encouraging, and we look forward to updating you on its impact to our operational and financial performance in the quarters to come. And with that, I’ll turn it over to Scott to run through our first quarter financial performance and our performance against our fourth strategic pillar of operational efficiency. Scott, over to you.

Thank you, Nick, and good morning, everyone. As I’ve done on the last several calls, I will reference pro forma numbers in 2020 that have been adjusted for fresh start accounting changes in order to more clearly describe the performance of our business versus previous periods. Turning to the results on Slide 22. Revenue was $1.45 billion in the quarter, driven by higher sequential data revenue, but lower voice, video and subsidy revenue. We earned $65 million of net income and $509 million of adjusted EBITDA. $274 million of our adjusted EBITDA came from fiber products. This was up 2% year-over-year as strong consumer fiber broadband growth offset declines in voice and other. We generated $528 million of net cash from operations in the quarter, driven by healthy operating performance and increased focus on working capital management. Turning to Slide 23. Our total revenue declined 11% this quarter, primarily due to the expiration of CAF II subsidy revenue. Excluding subsidy revenue, revenue declined 6%, consistent with declines from last quarter. Additionally, we sold our CPE business in Q4 of 2021, which negatively impacted year-over-year revenue by roughly $12 million in the quarter but had minimal impact to EBITDA. Fiber revenue was flat year-over-year. As consumer broadband revenue growth of 12% and business broadband revenue growth of 9% were offset by declines in video, voice and other. Excluding video, fiber revenue grew 3% year-over-year, representing an acceleration from 2% growth last quarter. Our Consumer fiber broadband ARPU grew 2% this quarter, consistent with our expectations, as growth from underlying price increases and a higher 1 gig or above speed mix was partly offset by our $5 autopay discount and promotional gift cards for new customers. We continue to expect these value-creating initiatives to be headwinds to ARPU growth until we lap them in the second half of 2022, but we remain on target for 3% to 4% ARPU growth for the full year. As I’ve mentioned on the last several calls, we made the decision to stop marketing video to new customers in early 2021, which has contributed to revenue declines but has had minimal impact on profit due to high content costs. Copper revenue growth declined 10% year-over-year as both Consumer and Business faced expected headwinds. As this year progresses, we expect fiber revenue growth to accelerate, driven by strong growth in Consumer fiber and continued stabilization in Business and Wholesale. We expect copper declines to moderate as our customer experience initiatives take hold, but we still expect overall decline in copper due to legacy product headwinds. As a final note on revenue, we expect the first quarter of 2022 to be the low point of the year for subsidy revenue. We expect subsidy revenue to increase sequentially to the $15 million to $20 million per quarter range by the end of the year, driven largely by the commencement of RDOF funding. Turning to Slide 24, as we noted before, the primary headwind for total adjusted EBITDA was the expiration of the CAF II subsidy. Fiber EBITDA grew 2% year-over-year as strong consumer fiber broadband growth and margin improvements offset EBITDA headwinds from legacy products. Frontier is a fiber-first company. Fiber products represent 54% of our adjusted EBITDA and will increasingly drive the growth trajectory of the overall company. Next, we will move to capital allocation on Slide 25. We made great strides on our business simplification initiatives this quarter. We exited approximately 20 office locations in the quarter, which resulted in a lease impairment of $44 million, and will reduce our operating cost structure going forward. We continue to perform well against our Fit for the Future cost savings initiatives. Through the end of Q1, we had realized $139 million of gross annual cost savings, exceeding our 2022 target of $100 million and putting us on track to exceed our initial goal of $250 million by the end of 2023. Additionally, the underlying cash flow generation of our business remains strong. Our newly centralized procurement team is doing an outstanding job managing through a challenging supply chain environment while also controlling working capital closely. We’re committed to managing our balance sheet in a disciplined manner, with net leverage in the mid-3s. Finally, our fiber build will be the primary focus of capital allocation over the next several years. Our projected build cost per location of $900 to $1,000 remains unchanged. Turning to our liquidity and debt maturity profile on Slide 26. We ended the first quarter with $2.2 billion of cash and short-term investments, and roughly $500 million of available capacity on our revolver, totaling roughly $2.7 billion of liquidity. In addition to the strong liquidity, we also have ample balance sheet flexibility. Our net leverage remained low at roughly 2.5x at the end of the quarter. Giving us healthy headroom under our net leverage target. Approximately 81% of our debt is at fixed rates, and we do not have any significant maturities earlier than 2027. This capital structure and maturity time line provide us protection from potentially higher interest rates, as well as a clear runway during our Wave 2 fiber build. Building on that point, Slide 27 describes our strong positioning in the current macroeconomic environment. The services we provide are critical to our customers, and we offer a wide range of products and services to meet specific needs including participation in the government’s affordable connectivity program. Our focus remains on offering customers a best-in-class service with unmatched value, and we are relentlessly focused on bringing more value to our customers in every action that we take. Our cost structure and our fiber build is also well positioned to withstand inflation, due to the multiyear agreements that we established in mid-2021, our expanded pool of labor and material suppliers and our Fit for the Future cost savings program. Finally, as I noted on the previous slide, our capital structure is also well insulated from rising interest rates, with 81% of our debt at fixed rates and no significant maturities until 2027. Moving to Slide 28 we are reiterating the 2022 financial guidance that we provided last quarter. We expect capital expenditures of $2.4 billion to $2.5 billion as we accelerate our fiber build to pass at least 1 million new locations and connect more customers across Consumer, Business and Wholesale. Two other notes on CapEx. We expect our build cadence throughout 2022 to follow a seasonal pattern, with a better weather quarters of Q2 and Q3 at a faster pace than the winter quarters of Q1 and Q4. Additionally, as we are accelerating our build from 2022 into 2023, we will have CapEx in the latter part of this year that is pulled forward from 2023 for material and build costs related to locations that will not be open for sale until next year. Finally, we are maintaining our guidance for adjusted EBITDA of $2.0 billion to $2.15 billion. By the end of the year, we expect an inflection point in EBITDA as we return to sustained EBITDA growth. I’ll close by bringing the Frontier investment thesis altogether on Slide 29. First, there is strong and growing demand for fiber, driven by expanding household data consumption. Fiber is a superior product for a number of reasons, including symmetrical upload and download speeds that far exceed cable’s capability, a lower cost of ownership driven by Fiber’s passive technology and lower latency levels that enable important uses like video conferencing and gaming. We have a clear strategy and purpose. We are 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. Last, we have attracted a strong and experienced leadership team who are singularly focused on executing our four-part strategic plan. I’ll now turn the call back over to Spencer to open up the line for questions.

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

Thank you. Our first question comes from Brett Feldman from Goldman Sachs. Brett, your line is now open. Please go ahead with your question.

Yes. Thank you for taking the question. Nick, I was hoping you could give us a little bit more color on what the competitive landscape looks like right now. I mean, obviously, the improving traction you’re having with your fiber net adds have, to some degree, becoming at the expense of your cable competitors. So I’m wondering what reaction you’re seeing from them. I’m also interested to hear your thoughts on the impact you might be seeing from fixed wireless and whether that’s different, whether you’re looking at your more rural areas versus your more densely populated areas where you’re deploying fiber. And then just in terms of the people who are coming to you for fiber, how many of them are switchers, meaning that you know they are disconnecting other service, versus to what extent are you just winning more jump balls as people are forced to make a decision when to move? Thank you.

Thanks, Brett. Three good questions there. Let’s sort of pick them off one of the time. It’s clear that the vast majority of our new customers are new to fiber. So equally, we are taking share from cable. And I think that’s particularly obvious in our base fiber market, where we are now consistently gaining market share, therefore, clearly taking share of cable at the same time. And I think that just reflects the fact that is, I hope now widely understood, that fiber is simply, a beta better proposition. In terms of reaction, of course, the cable companies are sophisticated competitors, and we’ve got a deep respect for them. But it is pleasing to see that in some parts of the country, the cable industry is now recognizing the fact that fiber is simply a better product and switching horses starting to invest in fiber. But even then, I reflect on the fact that we have at least a 12-month advantage in accelerating our build, locking in contractors for both labor and materials, fixing our forward prices and really delivering not just a better product than cable is able to do. But also a better service in many areas. And as some of our cable competitors have perhaps cut back on service more than they should have done over time, we’re investing as much as we can in improving service, as I said in my pre-prepared comments, and I think that risk is reflected in the fact that our NPS scores are systematically tracking up and have moved more than 30% in a single year, which is something I’m extremely pleased with. On FWA, I think we’ve said before, a number of thoughts. Firstly, FWA really is a fundamentally different proposition to high-speed fiber Internet. It’s not only a different proposition, but it also has fundamentally different underlying economics. Our fiber network is already mentioned end-to-end for us to take extremely high capacity. And we’re seeing on average use of our fiber customers of about 1.2, 1.3 terabytes, and at the upper quartile, more than 2 terabytes. Now if you compare that with the kind of announced usage figures from some of our FWA industry players of 300 to 400 gig per month, then we can see that data continues to grow in usage, there must be a point, at some point, where the economics of FWA simply flipped to be negative and highly negative, if that relentless growth in data continues. So I think what we are going to see – definitely it will be a feature in the market, it will always be there. But ultimately, as data grows as consumers want reliable and high-speed fiber internet, fiber clearly is the winner in the market. And that’s I think we see it.

Okay, thank you.

Thanks, Brett. Operator, we will take a next question, please.

So the next question is from Philip Cusick from JP Morgan. Philip, your line is now open. Please go ahead with your question.

Hi, guys. Thank you. Two things, if I can. First, EBITDA sequentially as we go through the year, especially if the regulatory side ramps, why would it be down any quarter from the current 5 07? It seems like the $2.8 billion is pretty cautious point. And then second, I thought it was interesting that new build penetration at 24 months is higher than your base penetration. What do you think is the barrier to getting that base back up towards where you used to be? Do you think it’s a sort of brand or legacy customer experience issue or are there more competitors in those base market so just a share issue over time? Thanks.

Sure, Phil, this is Scott. I’ll take the first one and then pass to John for the second one. So the strong start to the year in Q1 reinforces our confidence in our 2022 guidance, which, as you noted, was $2.0 billion to $2.15 billion of EBITDA. We expect Q1 to Q3 to be roughly flat as we will continue growing our consumer and SMB fiber, but we have some expected headwinds from wholesale repricing that we’ve discussed before, legacy copper products and then some cost inflation particularly in items like fuel and electricity. So that cadence we expect for the first three quarters, but we’re in a very solid position to have a significant inflection point in EBITDA by Q4 as we will have continued momentum from the Consumer and fiber growth, the full year impact of our Fit for the Future cost reduction programs and, additionally, the subsidy that we talked about, we’re confident that we will be there by the end of the year.

Yes, Phil, it’s John. Just real quick on the second. We’ve kind of talked down that first tranche, the 2020 build cohort in terms of its penetration rate. So what I mean by that is it’s a very small build, and it was sort of as optimal as it could be, as right sort of in the middle of what was the pre-existing rich fiber market that in their own right had very high penetration rates. So, as we were going out, it looks and it mirrors effectively what you would see on the ground in those markets as opposed to the broader penetration rate across the country. I think the important number is to keep an eye on for us as we go forward to the quarter and we will continue to disclose this every quarter, is a target of 15% to 20% at the 12 months mark, 25% to 30% at the 24 months mark. And as we go through right now, the last point I will make here is the first thing we did was with leadership was really gen to build to go fast, go hard at that. The channels are consumer and then business, a couple of months behind that. As those new teams were put in place mid of last year, they are now getting their engines really spooled up and going. Our expectation is we will be maybe at the upper end of those ranges that we just described. But I think what you will see as we go out into the second half of the year and into ‘23, that each cohort will start to really show at a really high level as we go through it. So, hopefully, that’s helpful.

Thanks very much.

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

And our next question is from Anthony Nemoto from Citi. Anthony, your line is now open. Please go ahead with your question.

Good morning and thanks taking the questions. Just to go back on the margins. For the quarter, I think you were expecting like a 300 basis point sequential headwind. And I m just wondering what drove that outperformance? And then in terms of the 100 megabytes offer that you announced last month for the ACP, any update on the traction for that? I mean how much of that contributed, if any, to the net adds in the quarter?

Sure. Anthony, this is Scott. On the margin outperformance, we did improve our margins beyond our expectations, largely driven by outperformance of our cost reduction program, our Fit for the Future program. We are ahead of schedule there. We have done some really great things in terms of real estate rationalization, improved productivity, improved demand management, both for electricity and fuel. So, we were ahead of plan in Q1, which led to that outperformance. As I noted before, we do have some continued headwinds just from fuel and electricity prices, and that’s why we have said we expect kind of flattish Q1 to Q3 EBITDA until Q4. And on the second question, I think the question was around participation in the government ACP program, we are seeing very healthy rates of uptake there. We put out a press release I think it was two weeks ago, about our new participation in the program. We think it’s an important way for consumers to be able to access high-speed broadband. We are a large participant in it, and we are seeing our numbers grow every day.

Thank you.

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

And our next question comes from Greg Williams from Cowen. Greg, your line is now open. Please go ahead with your question.

Great. Thanks everybody taking my questions. Your churn was really impressive, both in fiber and copper. So, copper at 1.53 and churn for fiber, I think 1.25. Are these levels – the way to look at it going forward, I think you have noted in the past that fiber can reach low-1s. Is this the low-1s or is there further improvement still? Second question just on the fixed wireless question, just dovetailing off the previous questions, are you seeing any fixed wireless taking from your copper base? I know you are saying it’s an inferior product, but it would take from there. And if not, I mean fixed always was took about half the broadband industry, I am curious to hear your thoughts on where they are getting from?

Yes. Greg, Nick here. Churn, yes, we made great progress on churn. We are conscious it’s a low volume in the market at the moment as well, moving perhaps to – and of course, that helps churn a little bit. But I think more importantly, it is a very significant effort we are putting into the company to systematically understanding the reasons for churn and then eliminate the week-in and week-out. And it’s never one big thing, it’s literally hundreds and even thousands of very small things that we have got to keep chipping away at. And that’s why we are seeing systematic improvements to churn in both fiber and copper. Therefore, is it sustainable, yes. Is it as low as I would like it to be, of course, not. We will keep pushing pretty slow. But we are kind of happy with the trend and the one we are currently operating in, we will always try to make it better if we can. I really don’t want there ever to be a reason why a customer want to leave us. On SWA, yes, look, of course, it’s going to be more attractive to the more rural, remote areas where fiber is perhaps some time out. But look, I think the way to think about it, if you are one of those customers and then fiber does turn up in the market, as we aggressively build out across our copper footprint and try and convert as many copper customers to fiber as we can, it is just a fundamentally better proposition. If you imagine results in the household with three or four 4K TVs, five or six cellular devices, a Playstation, whatever else you got to hanging off your network, it’s just going to work better on fiber. And that is doubly true if someone is working from home, which they might well be in some of the more rural areas, where you go

Got it. Thank you.

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

And our next question comes from Vikash Harlalka from New Street Research. Vikash, your line is now open. Please go ahead with your question.

Thank you for taking my question. Just anything off of the comment that Nick just made in response to the prior question, cable companies have sort of talked about a low switching environment, which is depressing the gross adds. So, you talked about that helping churn a bit. So, when switching environment sort of goes back to normal, does that mean that your churn would sort of go up? And secondly, what has been the take rate for the 2GBS product that you guys launched?

Yes. So, I think as the switching environment, does return to broadband assuming it’s done. Then, of course, that is naturally an upward force of journey, and that’s true for the industry, not just us. Perhaps the more important thing, I think is the underlying work we are doing to move the reason the churn in the core non-fiber market. And that, I think is a strong counterbalance force and that’s why our term will carry on trending down and stay in both copper and fiber. In terms of timing penetration, there is not a number we share. But what we really say, we are very, very pleased with the take-up. And that we now have about half of our new customers taking on gigabit and faster speed. And that, of course, helped our overall ARPU mix and is reflective of the fact that customers want high-speed fiber in place rather than as they use continue to include.

Yes. Maybe just if I can just one other point. Back to Vikash, your first question about switching environment. In reality, a higher switching environment, higher potential for switching higher move activity, all accrued value in our favor. In every single market where we compete, we are gaining share. And so the more customers that are in play, the higher opportunity we have to take those customers as broadband. So, I think the net add translation for us is only aided by increased volatility in the marketplace. And obviously, with the momentum that Nick and the team have built, we would expect that to increase over time not for the other way.

Got it. Very helpful. Thanks so much.

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

Our next question comes from Frank from Raymond James. Frank, your line is now open. Please go ahead with your question.

Great. Thank you. Two questions. So, just one clarification. So, with the positive net adds with fiber over copper, just to set the expectation, is this sort of the new normal, or could this bounce around a bit before it becomes a permanent trend? And then my second question that I hear a lot from investors is about pricing and the concern is that with a lot of the new competition coming in, pricing will get a lot worse. Can you comment on what you are seeing in the markets when you watch with fiber or where you have a competitive – your competitive with cable, what is the cable response been? And how do you feel the trajectory of ARPU is in those markets? Thanks.

Yes. It’s Nick. Thank you, Frank. Two excellent questions. On the first, yes, positive net adds is the new normal. That’s the environment we thoroughly intend to stay and continue to deliver quarter-over-quarter. On pricing and competitor reaction, as I said earlier, I think the primary reaction that we have seen is encouraged by is the recognition that fiber is better provider, and some of our competitors switches and starting to build fiber. Yes, we have seen some pricing movement as well. Look, I think in the future, the way we will end up competing is really on value more than price. And that, of course, seeing service, value-added services and so on. And that’s the way I would expect a rational market to compete. John, I don’t know if you have got anything to add on that?

No, no, exactly right. Yes, I agree with you 100%.

Alright. Great. Thank you very much.

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

Yes. So, our next question is from Simon from Morgan Stanley. Simon, your line is now open. Please go ahead with your question.

Thanks so much. Good morning. I was wondering if you had an update for us on Wave 3, what are your latest thoughts there? And maybe into that, just the latest thinking about the infrastructure bill and that money and how that might apply to those assets or other plans you have for that. And then I think, Scott, the restructuring looked like $54 million in the quarter. Is that cash, non-cash? I think you referenced the offices or the real estate being sold. And then how do we think about restructuring for the balance of the year? Thanks.

Yes. Hi Simon, it’s John. First to Wave 3, I will take the Wave 3, and Nick will go and then Scott has two for the last piece. As we referenced last year, Wave 2 was to build the $10 million total, so $6-plus million incremental build. That – no doubt about it, absolutely positive, this is a great return profile, go as fast as you can. And pulling them and segregating that piece, that Wave 2 from the balance of the opportunity set was very important for us because it allows for speed. And you heard Nick earlier referencing contracting for labor, for materials and everything else. Because we are able to get a jump on that, some of the supply chain issues that have buffeted a few of our competitors, have been less of a factor. Still to be managed, but less of an issue for us, and we have been able to move a pace towards the million plus that we anticipate building this year and onwards. But Wave 3 is not a sequential piece chronologically. It’s just a bit more work in terms of really getting down to a level of detail. And as we said on a prior call, the analysis here was to determine what is the inherent value of that set of assets. And then what’s the best way to unleash it to tap into it. And we have spoken about a number of things. Is it a full divestiture, is it a venture of some sort, is it an organic build and then what are the implications of the Federal funding that’s now being administered at the state level as we think about perhaps changing the underlying calculus on value creation. So, that’s all important, and that work has been underway. But important also to note is, on a parallel path, we have been at this now for about a year. And the company has increased its understanding of the fundamental leverage in the business down at a very, very local level. And in addition, through efforts like Scott’s leading on improving the cost base of the business, the channel leaders driving increased penetration rates and distribution market initiatives, all of that, what we see is that the return profile that we had initially modeled, candidly back in the bankruptcy and then that were further validated by the team, are actually conservative. And what we believe to be the case now is both for our Wave 2 properties and for Wave 3, we have an exceptional level of confidence that what we previously saw is the return potentials are actually understated, that we can do better. So, this has now introduced itself into the Wave 3 consideration as well. A long way of saying, we believe that the Wave 3 assets are of a higher value than we might have anticipated even six months ago. So, that work continues. We have said that in the next two quarters to three quarters max, certainly during the course of this year, we will then be out into the market with the fruits of that decision. And no delays here on our end, just doing the work to get to a final conclusion. On the infra build, as you would expect, this is important to us. We span 25 states today. And if we look across, there is literally thousands of applications that will be required in order to tap into the value opportunity that we can translate for customers into enabling our service in their markets. So, we have a team that has been assembled around it. We will be active in this space in the manner that you would expect. And we do think this could have a nice effect. That is not shown in any of our guidance that we lay out for the longer term future of the business, but we do believe that as we come through the other end of that process, that there will be incremental value creation for the company. Scott, do you want to take that?

Yes, Simon, on your question on the one-time items. The biggest part was the $44 million lease impairment as a result of our plans to exit roughly 20 office locations. That was non-cash. There was an additional roughly $5 million of severance-related costs based on a headcount reorganization, but that should be – that should definitely be the highest quarter we have in terms of restructuring, given that lease impairment was a one-time event.

Great. Thank you.

Thanks Simon. And operator I think we have time for one more question. So, let’s have our final question please.

Our final question is from Nick Del Deo from MoffettNathanson. Nick, your line is now open. Please go ahead.

Alright. Hey. Good morning guys. Thanks for fitting me in. First, you have talked about how some of your long-term supply contracts give you protection from supply chain issues and inflation risk. Can you help us understand like what share of your planned network build costs over the next few years are either contractually locked in or have capped annual growth rates? Just so we can understand how – the risk profile there. And then second, and maybe continuing with the theme of churn. If we remain in a low churn environment industry-wide, if this is a new normal, does that have any implications for your expected penetration rates or SAC or other key inputs to the model, or would any pressure on the subscriber acquisition side of the equation is the offset by better retention? Thanks.

Yes. Sure, Nick. Let me take those. So, on the fiber build, as you noted, we were fortunate to have about a year head start that led us to an extensive RFP process where we diversified our supplier base in both materials and labor. For example, where we used to potentially have one labor partner working in the geography, now we will have multiple ones that both provide price protection, but also kind of resilience of the supply chain if one contractor runs into issues. Coupled with that RFP process was signing multiyear contracts with most of our key suppliers, both on labor and materials. We haven’t given a specific number, but we feel very well protected overall in the build, which gives us confidence to reiterate the $900 to $1,000 cost per passing even in the inflationary environment across the macro economy. So, that’s on the fiber build. And on churn, I think you are right. I think we – number one, we are getting better at churn and even if industry-wide moves, return to pre-pandemic levels, that may increase churn a bit but also creates more switching that would allow us in increasing total number of gross adds, and therefore, net adds. At the same time, we are working very hard to reduce our subscriber acquisition cost with more efficient channels to market. We are seeing those numbers trend down as we improve our digital capabilities. So, both of those things together lead to improved views of the economics. And as John mentioned, both make our Wave 2 and Wave 3 assets more valuable than we probably thought they were 9 months to 12 months ago.

Yes. Maybe Scott, if I can. Just one other point, Nick, when we started out and segregated the base fiber network from the expansion fiber network, really had two things in mind at that point. One was it’s very hard for you all to understand how we are doing if we have this blended pot of the legacy fiber and new fiber, the more we are pumping new fiber print into the equation, it dilutes our total penetration rate, which is understandable, but tricky to model and manage as you are trying understand how we are going. So, that was one reason just to give you clarity on how we are doing there. But the other side was we wanted to, both our own internal purposes as well as for you all externally, to have a proxy for what was possible at the terminal penetration levels. And what we are showing, I think in every quarter, improving our base penetration rate work to 42.4, 42.5. Here at end of the first quarter, is even in this low-churn environment, we are taking share. So, the combination of our improving our own share and the gross adds to net adds translation, as Scott described before, is pretty positive, but we are stimulating enough demand and an up clarity. It’s not just a – we show up with a new product and the first 10%, first 20% comes kind of easily because any choice is better than the one I have got now. This is a much different market. It’s a mature market with two incumbent providers. And in those cases, we are taking share every quarter. So, I think that should and will continue. And there is no reason why that should look different when we talk about the ultimate terminal penetration on the new fiber build.

Alright. Thanks Nick. That concludes our first quarter 2022 earnings call. Thanks everyone for joining us. We will talk to you soon. Thanks.