Luke T. Szymczak - Frontier Communications Corp. Daniel J. McCarthy - Frontier Communications Corp. John M. Jureller - Frontier Communications Corp..

Batya Levi - UBS Securities LLC David William Barden - Bank of America Merrill Lynch David Scott Goldman - Jefferies LLC Frank G. Louthan - Raymond James & Associates, Inc. Barry L. McCarver - Stephens, Inc. Gregory Williams - Cowen & Co. LLC James Garner Moorman - D. A. Davidson & Co..

Good day, everyone, and welcome to the Frontier Communications Third Quarter 2015 Earnings Report Call. This call is being recorded. At this time, I would like to turn the call over to Mr. Luke Szymczak. Please go ahead, sir..

Thank you, Orlando, and good morning. Welcome to the Frontier Communications' third quarter earnings call. My name is Luke Szymczak, Vice President of Investor Relations. With me today are Dan McCarthy, President and CEO; and John Jureller, Executive Vice President and CFO.

The press release, earnings presentation and supplemental financials are available in the Investor Relations section of our website, frontier.com. During this call, we will be making certain forward-looking statements. Please review the cautionary language regarding forward-looking statements found in our earnings press release and SEC filings.

On this call, we will discuss GAAP and non-GAAP financial measures, as defined under SEC rules. Reconciliation between GAAP and non-GAAP financial measures is provided in our earnings press release. Please refer to this material during our discussion and review the cautionary language concerning non-GAAP measures in our earnings press release.

I will now turn the call over to Dan..

Good morning and thank you for joining Frontier's third quarter 2015 earnings call. I'm pleased to report that the quarter was marked by several significant accomplishments, as we head toward the closing of our transformational Verizon transaction.

We completed execution of the financing plan for the acquisition and received regulatory approval from both the FCC and the State of Texas. Meanwhile, we continued to execute strongly on our current business, delivering an 11th consecutive quarter of strong broadband net additions.

We also began our deployment under the Connect America Fund II program, which will meaningfully expand our business in rural America. Please turn to slide three. Today, I'm going to review our Q3 financial performance, non-financial highlights and give you an update on the Verizon integration plans.

Revenues increased 4.1% sequentially, based on the increase in regulatory revenue under CAF-II. We also extended the trend of revenue stability in Connecticut. The actions we took toward the end of Q1 to reduce the rate of customer migrations continue to result in an improved trend.

I am very confident that this issue is behind us and that Connecticut is on the right path. Revenues from small, medium and enterprise were once again very encouraging, as we grew SME revenue sequentially in Q3.

This adds to the track record that we discussed last quarter of six consecutive quarters of stable SME revenues; for a total of seven quarters of very favorable SME results at legacy. We also continued to see solid SME results in Connecticut as well. At the same time, we experienced higher operating expenses of about $29 million over the level of Q2.

These costs included a number of one-time and transient items and John will discuss these shortly.

Despite the temporary elevation in Q3 expenses, we remain focused on expense management, anticipate a sequential decline in expense levels in Q4 and have begun to implement additional expense reduction initiatives that will improve our expense levels again in 2016.

Most importantly, I want to assure you that I am fully confident that we will achieve and even exceed the synergy targets we have outlined for Frontier post-close of the Verizon transaction.

Furthermore, we also will have identified opportunities to improve efficiencies in our existing business post-closing through the application of new technologies that we are developing as part of the Verizon integration. We anticipate that this will result in an incremental improvement to our expenses.

Turning to the other highlights, the quarter represents our 11th consecutive quarter of robust net broadband additions with 27,200 added in the period. Once again this quarter, our success has been broadly based.

We have gained residential broadband share in more than 75% of our markets year-to-date, illustrating that our go-to-market approach continues to resonate. In addition, the broadening reach of our alternate distribution channels continue to contribute meaningfully both to the residential and commercial segments.

We continue to see more customers choose higher-speed broadband products. In the third quarter, 47% of the broadband activity was above the basic speed tier of six megabits.

More than 70% of our residential broadband customers are still utilizing our basic speed tier, so we have substantial opportunity to improve our average revenue per customer as they upgrade their service to higher speeds over time; this illustrates the benefit of our ongoing network investments.

We are continuing to expand speed and capacities, with some areas in Connecticut now being able to offer speeds in excess of 100 megabits over our copper infrastructure. Over time, we will be expanding the technology we use for 100 megabits in Connecticut to more of our markets elsewhere.

In our FiOS markets, we already offer speeds up to one gigabit and we have seen the benefit of offering these higher speeds as customers choose speed tiers to match their lifestyle choices. Please turn to slide four. Let me turn to a quick update on our Verizon transaction.

As you know, the Verizon acquisition will transform Frontier significantly, materially transitioning Frontier's revenue to a more diversified mix with better growth prospects. Our integration teams continue to work diligently, and we remain confident that we will be ready for closing on March 31, 2016.

Financing is completely in place, regulatory approvals are nearly complete with one pending. Union agreements have been reached, and integration is on track. I would like to provide more details on the integration process and our current status.

First, we now have completed all integration project plans that detail all responsibilities and critical paths in transitioning the network traffic from Verizon's network onto ours. Also covered is the system conversion as well as customer data migration. This is a highly complex process and attention to detail is critical.

Our goal is flawless execution. In this regard, I am very pleased to report that we have had the successful completion of our first mock data conversion. This process is off to a great start. We will have several more before we are ready to close, and our internal results are ahead of our expectations.

In terms of IT, we are continuing to put in place the necessary features and capabilities to handle the new market. This touches all elements of the business, handling dramatically expanded customer data, processing twice the number of monthly bills, and supporting double the number of employees.

In terms of operational readiness, our teams are developing and testing system enhancements and conversion code and preparing to train and on-board the transferring Verizon team members at close. As I have already mentioned, we have been working with the unions representing these new employees who will be joining us.

Collaboratively, we have looked at staffing needs and locations. This has been a terrific partnership and we look forward to continue to work together with the Communication Workers of America and the International Brotherhood of Electrical Workers to ensure a smooth transition.

Finally, our procurement teams are expanding our portfolio of supplier agreements to support our new operating markets. We are also putting in place enhanced logistics that we'll be ready to run smoothly on day one and beyond.

We continue to anticipate significant synergies as we eliminate allocated costs from the operations, and take advantage of Frontier's lower cost structure. The Frontier team is working to deliver at or above the synergies at EBITDA levels that we have communicated.

As we enter the latter phases of our integration efforts, we remain highly confident in delivering on the pro forma financial outlook we have provided.

We continue to estimate that the completion of the Verizon transaction will provide greater than 30% accretion to leverage free cash flow per share in the first full-year and will result in a solid improvement to our dividend payout ratio.

Putting together, the improving trends we anticipate in legacy, the stability in Connecticut and the Verizon acquisition next spring, we believe we should experience improving revenue trends following the close of the transaction. I will now hand the call over to our CFO, John Jureller..

Thank you, Dan. Frontier reported a loss per common share of $0.07 in the third quarter of 2015, after dividends on our newly issued preferred stock, compared to a loss per common share of $0.03 in the second quarter of 2015, and income of $0.04 per common share in the third quarter of 2014.

Adjusting for dividends on preferred stock, acquisition-related interest expense, acquisition and integration costs, severance costs and certain tax benefit items, our non-GAAP adjusted net income was $0.03 per share in the third quarter of 2015, compared to $0.03 per share in the second quarter of 2015, and $0.05 per share in third quarter of 2014.

Yesterday, the board declared a common dividend of 10.5 cents per share for the fourth quarter of 2015, payable December 31, in line with the dividend rate of the first three quarters of this year. We will also be paying the regularly scheduled dividend on our preferred shares on December 31. Please turn to slide five.

Third quarter revenue was $1.42 billion. Connecticut revenue of $264 million was stable with both the first quarter and second quarters of 2015. Customer revenue of $1.22 billion was down $13 million sequentially or negative 1.1%.

We are pleased that we have delivered three consecutive quarters of relatively stable customer revenue, despite the secular voice revenue headwinds, and our wireless backhaul revenue declines. Total residential customer revenue of $606 million was down $9 million as compared to Q2.

The decline was concentrated in our legacy operations as Connecticut was stable sequentially. Within our legacy footprint, quarterly residential data revenue increased by more than 10.6% over the prior-year. Further residential data revenue increased by nearly 1.2% sequentially, inclusive of Connecticut.

For our Connecticut operations, in each of the months of Q2 and Q3, we achieved a higher level of revenue than in March, the month in which we saw the largest revenue impact from residential customer pricing migrations.

The actions we took in Connecticut in the latter part of Q1 have resulted in an extended period of stability within the Connecticut results. We expect this trend to continue through the end of the year. Business customer revenue of $617 million was down only $4 million sequentially.

Growth in SME was offset by the anticipated decline in wireless backhaul as well as a modest decline in carrier wholesale revenue. Total data and Internet services revenue increased $5 million sequentially.

Growth in data services outstripped the decline in non-switched revenue, which includes our carrier services and wireless backhaul revenue streams as part of business customer revenue. Voice revenue declined as anticipated, reflecting the continuing headwinds of fewer voice customers.

Regulatory revenue for the quarter was $201 million, up $69 million sequentially. Regulatory revenue included $112 million of CAF-II revenue recognized during the quarter, which was partially offset by the elimination of USF frozen support revenue.

We anticipate another increase in regulatory revenue in the fourth quarter as we recognize the balance of the CAF-II true-up payment we received from the FCC in August for the first part of 2015. Residential average revenue per customer, or ARPC, was $63.83 for the third quarter of 2015, a decline of 0.9% sequentially.

Lower voice ARPC both standalone and within product bundles was the contributing factor, partially offset by improvements in data. Business ARPC was up 0.6% sequentially. The adjusted EBITDA margin in the third quarter was 41.4%, which was up 40 basis points from the second quarter level as a result of the CAF-II revenue recognized in the period.

We did have approximately $29 million in higher adjusted operating expenses in Q3 as compared to Q2.

On a sequential basis, approximately half of the increase in our operating expenses was from either one-time items in the quarter such as overtime-related costs for the restoration of customer service for the natural disasters we had, substantial floods in the Midwest and wildfires in the West, or from the added compensation expense associated with one additional workday in the quarter as compared to Q2.

We did have a slight change in sales channel mix that also led to a modest increase in customer acquisition expense. Channel mix varies from quarter-to-quarter, some fluctuations in this expense are inevitable.

As Dan mentioned, we have initiatives underway, for instance, in network optimization and carriage, that will have a benefit to our cost structure over time. Furthermore, once we have closed the Verizon transaction, we will have even greater opportunities, as reflected in the synergy targets we have provided.

Overall, we estimate lower adjusted operating expenses in Q4 as compared to Q3, when factoring out the Q3 one-time items. That said, as we get closer to the anticipated Verizon transaction closing date, we continue to ensure that we have the right resources for day one.

We are investing in our infrastructure as we focus on operational readiness at the closing. Capital expenditures were $177 million in the third quarter and we spent an additional $63 million in CapEx related to integration activities. Our CAF-I expenditures in Q3 were $6 million and we have now met all of our CAF-I requirements.

Please turn to slide six. Frontier's cash flow remains very healthy. Our leveraged free cash flow was $229 million in the third quarter.

Our adjusted trailing fourth-quarter dividend payout ratio remains very strong and sustainable at 50.8%, excluding the effects of the acquisition financing that came in the form of additional common equity, convertible preferred stock and senior notes.

Note that including the equity issued in Q2 and the debt issues in Q3, our trailing fourth quarter dividend payout ratio is higher at 61% (sic) [51%]. This will remain elevated until we include in the calculation the four quarters of operating cash flow from the acquired properties after closing of Verizon transaction. Please turn to slide seven.

Our leverage ratio at the end of Q3, pro forma for Connecticut was 3.7 times. Frontier's liquidity remains robust. Excluding the funds earmarked for our Verizon transaction, we ended the quarter with approximately $1.8 billion in cash and credit availability. As you know, we closed two substantial debt transactions in the third quarter.

The first was the $1.5 billion term loan A-facility that we completed in August, which will be drawn at the closing of the Verizon transaction, estimated to be at the end of March 2016. The second was the $6.6 billion note offering in September. The funds from this note offering are escrowed and included in our restricted cash balances.

Upon completion of our permanent capital raise, we extinguished our temporary bridge loan financing commitments.

As we move forward, it's important to reiterate Frontier's capital allocation framework; investing appropriately in our network infrastructure and operations, supporting our current dividend, and utilizing excess cash generated to reduce indebtedness and our leverage ratio.

We are comfortable with the leverage levels that we project after the closing of the Verizon transaction. We are committed to maintaining our liquidity and reducing our leverage over time. Slide eight presents full-year guidance for 2015.

Our leveraged free cash flow guidance remains a range of $825 million to $865 million, capital expenditure guidance remains a range of $700 million to $750 million, and cash taxes are now estimated in a range of $40 million to $50 million.

With solid planning, we have been able to offset the sequential increase in operating expenses that we experienced in Q3 and anticipate for the remainder of the year as compared to the first half, with a material improvement in cash taxes.

This improvement in cash taxes does not take into account any benefit that might come about if bonus depreciation extension legislation were to be enacted. If such legislation was concluded from a timing perspective, we would carry any related cash tax benefit into 2016.

In summary, Frontier's Q3 2015 operating results, our progress with the Connecticut transaction, our prudent capital investments and expense management, all provide a strong cash flow base and a solid financial platform for supporting and investing in the business.

We have ample capital to invest in and enhance our competitive infrastructure, service our debt, and comfortably sustain our dividend. I'll pass the call back to the operator, and open up the line for questions..

And we'll take our first question from Batya Levi with UBS..

Great. Thank you. Couple of questions, first on the revenue side. Connecticut trends were stable, but when we look at the legacy business, it looks like churn picked up and ARPC has come down.

Can you provide more color on what the drivers of that was? And looking out to 4Q, do you see this pressure on the ARPC, as I believe you add more data-only customers will continue? And second question on EBITDA, just to clarify, expenses went up about $29 million.

Should we assume about $15 million of those were one-time in nature, and should not repeat in 4Q? And to clarify, the $71 million in CAF benefit, did that fall straight to the EBITDA line? Thank you..

Batya, this is Dan. Let me just address the churn issue, and then I'll let John talk about the expenses and the revenue in Q4. So, Q3 is our seasonally highest level for churn. We saw actually good results on controllable churn.

We did see higher moves out of territory and some of that is unavoidable during the summer period, but we did see an uptick in the churn associated with customers migrating. And it was mostly in the legacy properties, it really wasn't a Connecticut phenomenon..

Hi, Batya. With respect to ARPC, we do see the potential for an improvement in Q4. We had a few factors in Q3 that contributed to the modest decline, but we do see an improvement in Q4. With respect to OpEx and EBITDA, let me sort of just clarify, if I could, we did have some one-timers in the quarter.

As I mentioned, we had certain storm activity, as an example, and other items that were unusual as compared to Q2. But that said is, we do anticipate adjusted operating expense in the fourth quarter to be between $815 million to $820 million, assuming no major storm activity. With respect to the CAF benefit, the answer would be yes.

The incremental CAF revenues that flow in or incremental regulatory revenues in total would go right to EBITDA. There's no incremental OpEx that's associated with that..

Got it....

And, Batya, if I could, since I think your follow-up question will be with respect to revenue and what do we expect? Just want to say, with respect to revenue in Q4, is we think that will be approximately equal to Q3, and that's inclusive of an estimated $10 million net increase in regulatory revenue in Q4 as compared to Q3..

So, it will be about $81 million in 4Q? The CapEx?.

I'm sorry?.

No. I'm sorry.

Can you repeat your commentary for the 4Q?.

Right. So for 4Q for revenue, if you look at our regulatory revenue, the total switched access plus subsidy, we anticipate in total that will be up approximately net $10 million in the fourth quarter, and that Q4 revenue as compared to Q3 in total will be approximately stable..

Okay. Got it. Just one follow-up on the churn commentary.

Have you seen any change in October churns in the legacy market, or are you implementing any different strategies to lower that churn?.

We do have a number of different strategies that our contact centers have been utilizing, really throughout the summer, as they try to battle some of the churn that does happen during that seasonal period. I think that in the fourth quarter, we actually see churn come back down.

Usually it occurs after October, so really November and December is when we see the biggest drops..

Got it. Thank you..

And we'll take our next question from David Barden with Bank of America..

Hey, guys. Thanks for taking the questions and for clearing up some of the expense questions. I guess, I had a couple of follow-ups. So first, John, just to make sure, we're all on the same page, with respect to the guidance.

Could you clarify whether the free cash flow guide is free cash flow or adjusted free cash flow as you've been defining it here? And then the second one is, I think every fourth quarter for the last couple of years, we get on the phone and talk about business services being weak, because of the promotional kind of redo that happens every quarter.

Could you kind of – you've given us some revenue guide, but you kind of map that issue out a little bit for us, and what we should expect for 4Q? And if I could, one last one. Just as it relates to the merger closing, California is the last pole in the tent.

Could you kind of discuss a little bit about what their asks are and your comfort level that they're within bounds of reasonableness in terms of the financials related to the transaction? Thank you..

Okay. So, Dave with respect to leveraged free cash flow, and that guidance range, that is, as we have always provided, as adjusted basis. Just to clarify, so that's equivalent to how we've been reporting it. With respect to business services or promotional activity. We don't see anything major in the quarter.

You know, we've had our Amazon Prime promotion that's really added to – done great traction with our residential customers, so we don't see anything unusual in the quarter. I think the dynamics that we see as we go forward, continuing pick-up on our broadband net adds, we do see some of the secular headwinds still in our voice revenue streams.

And we will have a little bit of step down with respect to our wireless backhaul revenue. But other than those items, nothing has really changed with respect to our business as we go forward. Our alternate channels continue to drive great activity in SME, and more business there. So, we're optimistic about the path for SME revenue stream..

This is Dan. On the California part of your question, it's been a long process. It's been very collaborative. The Commission held a number of public comment hearings really around the entire service area. At this point, our philosophy has been to work collaboratively with the different parties in the transaction.

I think we've got a lot of success on that and that way we really align some of the requirements to meet the public needs, benefit test with what our business strategy is for the state.

So, as I sit here today, all of those agreements, although it brings substantial benefit to the systems of California, we're also aligned with what we want to do from a business perspective that includes broadband expansion in some areas, which we had really forecasted and put in our cash flow models, use of CAF-II funds in various parts of the State of California, as dictated by the CAF-II rules.

Speed upgrades, which we had planned to do in some of the capital markets and hence reporting about supplier and diversity supplies.

And really, we're at a point now after reaching essential agreements with the vast majority, if not all, of the parties, that the Commission will draft their order and then we'll see what the final requirements are by the California Commission.

We still expect to have that draft to order over the next several weeks and that we're still anticipating an approval in the late-December timeframe..

Great. And I appreciate that, Dan.

And John, I'm sorry, just to totally make sure I'm thinking about this right way, your free cash flow guidance includes the expenses related to the preferred dividends and the interest expense on the bonds that were raised for the Verizon transaction, correct?.

No. Our leveraged free cash flow as we defined and as you'll see in the schedules that excludes the preferred dividend in the incremental interest on the acquisition-related financing..

Got it. Okay....

And that's how we consistently define that..

Right. Thank you..

Okay. Thanks, Dave..

And our next question comes from Scott Goldman with Jefferies..

Thanks. Good morning, everybody.

I guess, just following up on the expense side of the equation, I noticed head count was up a bit 2Q into 3Q, wondering if that's tied into the Verizon integration activities that you guys are undertaking or perhaps elsewhere and whether that was a factor in the expenses that the non-one-timey type of expenses that we saw in 3Q.

Also on the expense side, I think you mentioned that channel mix produced some higher costs. I think you mentioned it was lumpy.

Just curious, how we should think about that channel mix and maybe the go-to-market strategy and what that implies about the expense side going forward? And then just lastly, on the CAF-II, I think you've provided some good details.

I was just wondering if you can maybe share how much CapEx was related to CAF-II in the quarter and what your expectations are for this year and for future years on the CAF-II CapEx side? Thank you..

Great. Scott, I'll start off and then let Dan take it up. With respect to head count, really most of that head count was related to our Frontier Secure strategic partnership support. We've been driving great incremental revenue with our strategic partners and so we had some head count to support that offering.

That's proven to be very profitable for us from a revenue perspective and driving incremental EBITDA. So, the head count was primarily around that. And it did add, too, a sequential increase in the quarter as compared to Q2 in our expense..

Yeah. Scott, and on the channel mix, as you rightly pointed out, it was up slightly differently. We tried some different things this summer and I think that's reflective in the strong broadband performance that we were able to post.

Historically, we've tried to target a mix that was more heavily based on inbound calls for our contact centers, and that's generally our lowest-cost channel. In this case, we tried to meet customers in a different place, not use some of the traditional marketing techniques and relied more heavily on some of our partners from the alternate channels.

And we saw very good results, did come with a slightly higher costs; but again, as John pointed out, that would change quarter-to-quarter. We would target a lower-cost mix as we get into Q4, which is historically when we start to see call volumes pick up more substantially in our contact centers and we get more of a mix from that channel.

As far as CAF-II goes, we really got the funds in and we started, but we really only spent about $2 million in the quarter. We'll start to ramp that, but we'll quickly get shutdown as we get into October as certain municipalities prevent us from opening roads or really starting any progress.

So, we'll see more of a ramp up as we get into 2016 and we'll provide more guidance on that as we get through the end of the fourth quarter..

Great. Thank you..

Moving on, we'll hear from Frank Louthan with Raymond James..

Great. Thank you.

Just to clarify, can you quantify some of the impact of some of the floods and the fires and that sort of thing? And then, just looking at your customer adds, so with your net loss of residential customers in the 30,000 range, and adding about 27,000 broadband to the scheme, could you give us an idea of that mix? What is sort of the economics of that trade-off there and the types of customers that you're losing maybe and how of many of those broadband customers are existing customers that are adding broadband versus completely new customers you're getting in the market?.

Frank, Dan and I still want to make sure we clarify your second question. As to the first one, storm cost probably added an incremental $5 million to $6 million in the quarter sequentially as compared to Q2. And that's both primarily overtime-related costs as well as some outside services, but the restoration costs were pretty substantial.

As you know, the flooding was quite significant in the Midwest. But perhaps, can you just sort of repeat again your second question? We want to make sure that we've heard it correctly..

You had a nice add – gains in broadband.

To what extent is that offsetting – how are the economics of these broadband customers tracking now with your, sort of the residential customers that you're net losing? Are you gaining broadband share in the marketplace? To what extent of those – what is the mix of brand new customers taking broadband versus existing customers upgrading, and is it sort of a net outflow of customers and what's the economic trade-off?.

I'll start, and John will probably jump in, Frank. So, we're still seeing very strong market share growth, especially in our legacy areas. As I pointed out, year-to-date, 75% of the market we're experiencing growth.

One of the nice things that we see is continued trend to have close to a third of our activations have Frontier Secure activated on the account. That gives us a nice ARPC lift of about $10 per sub. The trend that we've experienced historically of R1 losses and customers who are at that lower end of the portfolio continues.

During the summer, we do tend to see an uptick in customers that might have double player and in some cases triple player, as they move or make their decisions about moving their homes to a different location. So, during that period we do see an uptick in some of the higher ARPC customer losses.

But I would say the general trend that we've talked about historically of lower-end customers leaving and then us replacing them with broadband customers that are taking other services continues..

Frank, just to add. As in prior quarters, we had a slight decline in net residential customers, and what we've seen is that loss has been mostly from voice-only customers; that's been our continuing trend. Again, we continue to add broadband customers; those counts increase.

And more of our new customers that we add are in, you know, take broadband services, probably 91% of our gross adds in the quarter were at least a double-play, if not a triple-play customer..

Okay. Great. That's helpful. Thank you..

Our next question comes from Barry McCarver with Stephens, Inc..

Hey. Good morning, guys, and thanks for taking my questions.

I guess, as we think about your integration efforts of the Verizon assets, can you talk about what the near-term performance of those assets have looked like for you? And then just secondly, you talked about some incremental efficiencies from scale after you acquire those assets and get them fully integrated.

Any way you could kind of quantity what you're seeing here? Is that couple hundred basis points margin over a few years or less than that? Thanks..

Sure. Barry, with respect to the asset performance of those three states, we'll be providing that information later on this quarter. Once we have full data from Verizon, we'll be filing that. But I think you've seen their results that they announced earlier a few weeks ago. But with respect to these properties, we'll be providing those in particular.

With respect to margin improvement or cost; again, I would just highlight, as Dan will jump in here, that we remain very confident in our day one cost reduction, that's a net of $525 million and $700 million by the end of the third year.

We're seeing opportunities for actually that to be higher on the first day and in total for the $700 million to be accelerated faster than the end of the third year. And the work that we're doing, as we go over each week and each month, continues to reinforce what we're forecasting..

Yeah, Barry. From the different things that are plusses for us as we go through this integration, it has been an extensive amount of investment in a number of things that really move us much closer to a Verizon way of doing business, is the best way I can describe it.

So, a lot more self-service for customers, so that they can manage accounts, they can manage the services that they've purchased from us. They have the ability to interface with us with different choice points. All those really equate over long-term to improvements in our cost structure.

Provisioning and our provisioning platforms that we'll be utilizing for our flagship products are all being enhanced and changed.

Our dispatch system and how we manage our technicians around the country, testing and diagnostic tools that are available to both our technicians as well as our help desk and contact centers, and really moving more to a VoIP, least-cost routing approach towards LD carriage, which is something that Verizon had moved to in the past.

So, when you combine all those things that we're investing to be ready for these three states, and you apply them to our historic properties, you get a real opportunity to make some substantial changes..

And moving on, we'll hear from Simon Flannery with Morgan Stanley..

Hi, Spencer (38:46) for Simon. Quick question on cash taxes; you guys lowered guidance again. What are the drivers there and any implications for 2016? And then what's the latest you guys are hearing on potential for bonus depreciation? Thanks..

Sure. You know, Spencer, I think with respect to cash taxes, it's some more planning work that we've been able to do all along the way. There are various specific elements that we've worked through that gives us a great level of comfort on this reduced level of cash taxes.

As we've previously indicated for 2016, we had done a range estimate of $275 million to $325 million and that was done mid third quarter. I will say, however, that bonus depreciation would improve that and some further planning elements. So, I'm going to hold on providing any updated cash tax guidance until we get into 2016.

But, I think suffice it to say is, we do feel comfortable with that number being at the upper end of the range, but we'll add more specifics as we get into next year..

Hey, Spencer. This is Dan. From what we're hearing, we are hearing that there's a very good possibility that a bill could be reached and compromised that would extend it at a minimum two years. That's what we're hearing at this point. But it would be towards the latter part of this year..

Right..

And so was that....

Yeah. Spencer, so the impact of that, the benefit of that we would see in 2016 since we think we've pretty much completed our cash tax payments for 2015. So, any 2015-specific benefit we would see that in 2016..

Okay. Great. Thank you..

And Gregory Williams with Cowen & Co. has our next question..

Great. Thanks for taking my question. It's just about the Verizon acquisition, you guys have mentioned in the past that this is a bit of a unique acquisition and that Verizon's committed to a certain level of OpEx and CapEx spend? And I was hoping you could provide a little color on that commitment.

Is it KPIs or metrics that need to be achieved or a certain dollar amount in certain categories and how much discretion do you have in the way in which they spend it? Thanks..

Yeah, Greg, the real metric is around a minimum level of CapEx that's required based upon historic trends and they really are still running the business. They are making investments and we're watching and we're very pleased with the investments they're making at this point.

Those included upgrades to both their fiber and their copper facilities as well as selectively upgrading things like microwave towers. So, we feel pretty good about the working relationship at this point.

We'd feel very good about the investments they're making and we're very comfortable that the business continues to perform very well and we look forward to seeing the results from Verizon over the next couple of weeks..

Greg, also to be more specific, with respect to OpEx their commitment is really around marketing expenditure within OpEx. So, it's that, plus CapEx..

That's helpful. Thanks..

All right. And I think, operator, let's take one last question please, if we could..

Absolutely. We'll hear from James Moorman with D. A. Davidson..

Yeah. Hi. Thanks for taking the question. Quick question, in terms of what do you kind of see in SME in terms of Connecticut? Seems like you guys had a really good quarter last year.

And what are you seeing in terms of competition in Connecticut on the business front?.

Yeah. On the SME front, we see comps – certainly robust competition on the very small end that are more attributable to cable competitors that are in the different markets. At the very high end, which we don't necessarily play as much in the upgraded space; I mean, we do in certain markets.

But that seems to be where more of the higher-end service than some of the other competitors are playing. We feel very good about the total solution that we offer.

Our sweet spot is more on the high-end, and the small and the medium and the lower end enterprise, those areas we bring real value to our customers in providing turnkey solutions, as well as a robust network that can interconnect to their local facilities. So, it might be a healthcare customer. It could be a trucking customer.

So, those are places we've played well. We're doing quite well there providing solutions. And the other area that I would just say is we're starting to see some traction in our Ethernet on our wholesale side. So, you asked about SME, but I think in the future you'll see continued growth in that segment as well..

So in closing, we once again had a very solid results this quarter, both in the legacy and Connecticut portions of the business. In the third quarter, we were successful in completing a broad range of significant milestones for the acquisition of California, Texas and Florida markets. And our integration activities remain on track.

The entire company remains intensely focused on increasing shareholder value and we believe we have significant opportunities ahead of us. So, thank you for joining us on our call today. And we look forward to updating you again on the fourth quarter..

And ladies and gentlemen, that does conclude our conference for today. We thank you for your participation..