Luke T. Szymczak - Frontier Communications Corp. Daniel J. McCarthy - Frontier Communications Corp. R. Perley McBride - Frontier Communications Corp..

Batya Levi - UBS Securities LLC Philip A. Cusick - JPMorgan Securities LLC Spencer S. Gantsoudes - Morgan Stanley & Co. LLC David William Barden - Merrill Lynch, Pierce, Fenner & Smith, Inc. Gregory Williams - Cowen & Co. LLC Matthew Niknam - Deutsche Bank Securities, Inc. Frank Garreth Louthan - Raymond James & Associates, Inc..

Please standby. We're about to begin. Good day, everyone, and welcome to the Frontier Communications Third Quarter 2016 Earnings Conference Call. This call is being recorded. At this time, I would like to turn the call over to Luke Szymczak. Please go ahead..

Thank you, and good afternoon. 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 Perley McBride, Executive Vice President and CFO.

The press release, earnings presentation, and supplemental financials are available on 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 afternoon and thank you for joining Frontier's third quarter 2016 earnings call. About three years ago we embarked on a substantial transformation of our business, starting with our Connecticut acquisition and more recently the acquisition of our new markets in California, Texas and Florida.

Through this process, we have more than doubled the size and scale of the company, improved the quality of our assets, substantially diversified our revenue streams and geographic footprint and expanded the sophistication and attractiveness of our product offering.

You have taken on a challenge of this magnitude and complexity in such a short period of time. And I'm very proud of our overarching accomplishments and pleased that in the just completed third quarter we've made substantial progress.

Nonetheless, important aspects of our third quarter financial results are disappointing and illustrate how much further we have to go. I wanted to assure you, that I'm focused on addressing and resolving the issues hindering our performance.

I'm fully aware that the third quarter results underscore the urgent need for our expanded business to perform at the higher level, where I know it can and should. And you have my personal commitment that we will do so. Let me go right to the issue of our revenue results. Third quarter revenues were $2.52 billion.

This total reflects our taking a $20 million reserve associated with resumption of customer credit treatment in CTF during the third quarter. Excluding this and adjusting for the one-time recognition of $12 million in CAF II funds for the CTF space in the second quarter, revenue declined $52 million sequentially.

This decline is unacceptable and reflects a level of performance, that I'm committed to change it. And during this call, I will discuss some of the means that we are using to make this change. Let me also highlight that today, we announced a new customer-focused organizational structure, and the creation of commercial and consumer business units.

This change is designed to improve our execution and operational effectiveness, increases spans of control in the organization and makes us more nimble, while at the same time eliminating duplicative costs associated with our former structure. In the first month of operating our new properties, it became apparent that this change was necessary.

And I'll talk more about this realignment in a few moments. Please turn to slide three. Highlights for the quarter included the following. We achieved adjusted EBITDA of $1 billion, in line with the target that we had outlined for you previously.

When we saw decline in revenue, we made real time adjustments to our cost structure and we will continue to work on both revenue and expense levels to ensure we deliver EBITDA at or above the $4 billion level we have provided as our estimate for 2017.

We will provide formal guidance for 2017 during our Q4 earnings call following approval of our annual budget by our board of directors. CTF subscriber trends improved sequentially in the third quarter, although it is not yet at the rate we are targeting.

This slower rate resulted because we began marketing during the seasonally slowest sales period, we on-shored our customer contact centers, which initially impacted our principal sales channel negatively and we resumed customer collection processes. The last point began in the final month of the quarter and will have an impact in Q4 as well.

This is a normal part of our integration process. We plan on addressing this by the end of Q4, at which point receivables will be at a normal level. We will provide a breakout, so that you can monitor our progress on these key metrics.

Although our net subscriber performance affected Q3 revenues in CTF, we remain disciplined in our base management processes and did not experience revenue or margin erosion as customers migrated from promotional pricing to normal price points. This was a key focus for the company and we executed well on that front.

As we ramp marketing and adjust our offers, we expect continued improvements in net subscriber performance in the fourth quarter. We anticipate exiting the year at or close to normal levels of customer activity that would support a more stable revenue performance in CTF.

We'll take a moment to address the Q3 impact, in both legacy and CTF, of the on-shoring of our customer care function. During Q3, the new contact center reps were still building competency in the use of our systems, as well as intimacy with our products. As a result, our call centers, our most important channel, underperformed our expectations.

We believe we have completed this transition successfully at this time and are beginning to see improved results. So, in summary, as it relates to subscriber performance, I anticipate that legacy broadband net additions will be positive again in Q4, but it is too early to determine if they will be back to historic levels.

A positive in Q3 was the revenue enhancement program we put in place on our legacy properties. This program contributed to improved ARPC and also helped drive an improved sequential result in Q3, despite the weak net additions. We were pleased with our ability to raise pricing in line with the market on select customer segments.

This represents on net a benefit of approximately $12 million to quarterly legacy revenue, a portion of which was realized in Q3. The full run rate amount will be realized in Q4. The negative impact of any associated churn with this will be isolated to Q3. I am pleased to report that this was our 11th sequential quarter of roughly stable SME revenue.

This is a very impressive result, particularly when compared against trends of peers. I believe this remains one of our best opportunities. And with the new organizational structure, we plan on increasing our focus and alignment of resources, to improve our commercial trends. The final highlight involves network speed improvements.

Last quarter, we outlined our plans to expand our speed capabilities, so that approximately 2 million additional addressable households would be enabled for 50 megabits or higher speeds. To date, we have enabled in excess of 800,000 households.

So, this project is well underway and we are beginning to market these incremental capabilities in the upgraded areas. Please turn to slide four. In September, we raised our synergy target to $1.4 billion per year, up from $1.25 billion target outlined in the second quarter earnings report.

Yet-to-be attained cost synergies of $250 million are anticipated to be achieved by mid-year of 2017 with the incremental $150 million anticipated to be achieved by mid-year of 2019. As I noted earlier, we are announcing a new organization structure.

Among the highlights of this is the creation of a distinct customer-facing units for consumer and commercial.

The benefits of these new units are greater focus on the different needs of consumer and business customers, a more efficient allocation of resources and more standardization of business processes, which will allow greater automation and further cost reductions.

The savings associated with our new organizational structure will be partially realized in Q4 and will be largely in place as we start the new year.

We will continue to leverage the strength of the regionalized organizational structure that has served us so well and we are adapting it to allow us to keep pace with the dynamic competitive markets we serve.

Operational leadership in each state will continue to have the objective of delivering high-quality service, and exceeding our customers' expectations. They will also act as a connection to the various communities to ensure we have local paths for community engagement.

Functions that are not customer-facing, including engineering, finance, human resources, communications and marketing will be centralized, increasing efficiency and effectiveness. Our focus in the consumer market has not changed. We will pursue opportunities aggressively in all of our FiOS markets.

We have begun the process of upgrading broadband capabilities in non-FiOS areas of CTF. In fact, we'll have the first 300,000 households upgraded over the next 90 days and open for sale. We are continuing to expand our Vantage product footprint.

And we're planning a re-launch of our legacy FiOS areas following the successful conversion of the base to the new and improved Interactive Media Guide and the integration of our improved VOD library. And we are on track for our CAF II deployments to offer broadband to these underserved markets as quickly as practical.

We'll have 170,000 households open for marketing by year-end, and another 90,000 non-CAF II households in adjacent areas. For commercial, we have realigned sales, marketing and commercial product management under a single leader, reporting directly to me, which is a significant change from our practice over the last few years.

This builds on the substantial improvements we have been making behind the scenes over the last 12 months, in revamping both our sales and support staff and our commercial marketing platforms. Even before these changes, we had compiled an impressive, consistent, steady performance track record in the SME portion of commercial.

Our increased focus and emphasis on the commercial market will enable us to be a more nimble, responsive competitor. Another benefit of our new organizational structure will be more efficient capital management. The new structure will allow us to allocate capital more dynamically, prioritizing the highest return opportunities.

The near term priorities will be supporting the areas that I highlighted earlier and on IT enhancements, that will drive improvements in our cost structure. Please turn to slide five.

In contrast to the second quarter and third quarter's focus on cutover, integration and building organizational competency, we have now shifted our focus to the following. First, we will continue to improve our performance in the CTF markets, most notably in the FiOS portion of consumer.

Second, as we enable new broadband capabilities in CTF and legacy markets, we will begin ramping marketing and sales accordingly. Third, we will drive commercial sales after spending much of 2016 building prospect pipelines in the new markets.

And finally, we will implement our new organizational structure and implement our synergy and efficiency projects to drive improved cost structures in both legacy and CTF markets. These are our top priorities of the entire organization and the senior management will be held accountable for delivering these results.

As we have discussed consistently, our company has been in integration mode for nearly three years. As we move forward, we will have a laser focus on ensuring our cost structure is continually evaluated and adjusted in keeping with the realities of the marketplace.

Let me assure you that we will continue to manage our cost structure to match the revenue trends and we are firmly committed to our objective of exceeding $4 billion in adjusted EBITDA in 2017. Let me say a few words about FCC potential changes in the pricing of business data services.

On October 7, the FCC released a factsheet highlighting details of its proposed changes. Frontier remains opposed to the current framework and we will continue building support for the proposal that we submitted in conjunction with Sprint and Windstream.

As a reminder, if the factsheet framework is adopted for implementation in July 2017, we project an impact of $10 million in 2017, and an additional impact of $20 million in each of 2018 and 2019 with lesser impacts in the following years.

If the FCC implements this rate reduction, we will mitigate any revenue declines with additional cost reductions. Last week, the FCC placed this item on its agenda for board and its open meeting scheduled for November 17. To summarize my comments, we have completed the bulk of the integration of the new markets.

This includes achieving completion of the on-shoring of the contact center resources for both tech support and customer care faster than originally planned. We are working to improve performance from all of our distribution channels to move our sales to a more normal trend in Q4 timeframe.

Our organizational restructuring is underway and we will enhance our ability to execute in the consumer and commercial segments, while significantly improving our cost structure. As you can tell, this is a very busy time at Frontier.

The focus moving forward is all about execution in driving sales and aligning our cost structure to the realities of the current markets. And I'm confident that we will begin to see the benefits of all of this focus over the coming months.

Before I turn this call over to our new CFO, I wanted to thank John Jureller for his service and dedication to the company. As we stated on September 12, John made significant contributions during our Connecticut and CTF acquisitions, particularly in connection with the negotiation of the deals and associated financing transactions.

I've known Perley for almost 16 years and worked directly with him for almost 10 of those years. He is the right CFO for us at this time, because he is laser focused on operational excellence and cost management. He will be invaluable to the company and me as we move forward. And now, I'll turn the call over to Perley, to review the financial results..

Thank you, Dan, and good afternoon, everyone. Let's turn to slide six and I'll begin with the key financial highlights of the quarter. Third quarter revenue of $2.52 billion declined $84 million from the $2.61 billion reported in the second quarter. Customer revenue of $2.32 billion declined $62 million, and I'll discuss this in greater detail shortly.

Switched access and subsidy revenue of $205 million declined $22 million sequentially, with $12 million of this decline related to the one-time recognition of CAF II revenue in the second quarter, which did not recur in Q3.

Another $6 million of the decline was related to the scheduled step-down of switched access rate and $3 million of the decline was related to the CAF II phase down. In other words, only $1 million of the $22 million was related to displacement of minutes-of-use. Adjusted EBITDA of $1 billion was in line with the outlook we provided on September 21.

This represented a margin of 39.6%, which was stable with the second quarter. We generated free cash flow of $168 million, after payment of dividends on our preferred stock. Adjusted free cash flow was down sequentially, in part because of the sequential increase in CapEx. On slide seven, we show the breakout of customer revenue between legacy and CTF.

In legacy, customer revenue of $1.16 billion was down $7 million or 0.6% sequentially, which is a significant improvement from the 2% sequential decline we experienced in Q2. The factors driving the change in Q3 were a $9 million sequential decline in residential, partly offset by a $2 million sequential increase in business.

As Dan mentioned, our revenue enhancement program underway in the quarter, contributed to Q3 legacy residential revenue and we expect an additional incremental benefit in Q4. We are investing to enhance and expand our broadband and video capabilities and we expect these investments to contribute to an improved revenue trend over time.

Moving to CTF, customer revenue of $1.16 billion was down 4.5% from the $1.21 billion reported in the second quarter. A primary factor in the decline was residential revenue, which was down 6.8%. Business revenue, up $456 million, was down only 0.9% sequentially.

In business, our legacy ARPC was up $13 sequentially as a result of an improved revenue trend in Q3. Business ARPC in CTF of $615 was also up sequentially, but is still substantially below the level of legacy ARPC.

The new commercial business unit that we announced today will improve our ability to differentiate our services for business customers and tailor solutions to unique needs of various segments of the market. We have already made solid progress in this area.

The CTF product view provides more color on the drivers behind the revenue decline in the quarter, with video down 6.5% sequentially and voice down 3.4% sequentially. Residential subscriber declines are the primary driver of this revenue trend and we are focused on achieving improved trends.

In contrast to the video revenue trend, data and Internet was up slightly sequentially in Q3 and this was consistent across both residential and business. The $12 million sequential decline in CTF other revenue includes the $20 million decline related to the receivable reserve we have taken in CTF, which Dan mentioned.

This was offset by an increase in anticipated late fees, reflecting recovery to normal trends as we were not charging late fees in Q2 due to the transition. Turning to slide eight, we see that gross additions for legacy were down in Q3.

As Dan outlined, the issues were typical third quarter seasonality and the transition of the call centers as a result of the on-shoring that occurred in Q3. Broadband churn in legacy in Q3 was up slightly, reflecting the disruption in the call centers as well as the impact of the revenue enhancement program.

Video churn was more stable, but still elevated compared to the first quarter of 2016. Within CTF, growth additions improved sequentially for data and video but have not returned to the level achieved under Verizon as illustrated in the graph. Returning these metrics to pre-acquisition levels is the top priority.

CTF video churn increased in Q3 but data churn was relatively stable yet still elevated compared to pre-close levels. Finally, in terms of the total customer churn, in legacy markets, it was approximately 1.9%, up about 20 bps sequentially. Customer churn in CTF was up about 10 bps sequentially.

Longer-term, we anticipate the expansion of video in the legacy market to have a positive influence on customer churn. On slide nine, residential ARPC in our legacy markets of $63.41 was up $0.36 sequentially. The principal driver of this increase was the revenue enhancement program that Dan discussed earlier.

In CTF, residential ARPC of $108.69 was down $1.61 sequentially. Excluding the receivables reserve it would have been up $0.64 sequentially. On a combined basis, our ARPC was $82.34, down from $83.20. However, excluding the receivables impact, it would have been up slightly. Turning to slide 10.

Our Q3 adjusted operating expenses in legacy improved by $22 million sequentially to $799 million more than offsetting the modest decline in revenue. These expense reductions were achieved through better management of outside vendors and variable cost reductions.

As a result, adjusted EBITDA in legacy was $513 million, up 1.6% sequentially despite the decline in revenue. The adjusted EBITDA margin in legacy was 39.2%, up 110 basis points from the prior quarter. Adjusted operating expenses in CTF declined about $29 million sequentially or 3.8% due in part to lower content costs.

Adjusted EBITDA in CTF of $486 million was down about $41 million sequentially. This represented an adjusted EBITDA margin of 40.0%. Excluding the receivables reserve, adjusted EBITDA margin would have only decreased 20 bps from the 41.2% experienced in Q2.

We are committed to adjusting the expense base of the business and respond to changes in revenue trends and intend to drive overall margins higher over time. Our plan is to achieve $250 million in expense synergies by mid-year 2017 and a total of $400 million by mid-year 2019.

As we demonstrated in Q3, we can also attain expense reductions that are not synergy related. As we move to slide 11, in Q3, our capital spending was $403 million, up from $350 million in Q2. The increase was related to seasonal capital projects and a delay in CTF capital spending post close in Q2.

We are updating our capital spending guidance for 2016 to a range of $1.25 billion to $1.275 billion, which implies a sequential decline in fourth quarter capital spending.

Growth initiatives account for approximately half of our 2016 capital expenditures, most significant are the numerous broadband enhancement and expansion programs we have underway.

Including the more than 800,000 additional homes passed that have been enabled for 50 megs or greater capability, as well as the new broadband builds in the comfort areas of CTF. About 300,000 of the 500,000 new builds should be complete by the first quarter. Also included in this category are the CAF II homes that Dan discussed.

As well as the targeted fiber-to-the-home expansions we're doing. For business, we continue to expand and enhance our Ethernet capabilities and make additional investments to expand new services to business customers. The video builds we commenced will reach a 150,000 households in three markets this year.

We're also making investments in IT capabilities that are directly related to driving incremental revenue. The remainder of our capital spending is a combination of IT investments related to productivity enhancement and maintenance related projects.

Looking toward next year, our capital spending plan for 2017 is in the range of $1.2 billion to $1.3 billion. While this is a decline, our larger size has enabled greater efficiency, including better pricing and procuring goods and services.

Additionally, our CapEx spend on integration has allowed us to transform our operating support systems and provisioning platforms. These investments have positioned us well, which also allows us greater flexibility in 2017. So despite a lower absolute spending, we expect to have an equally robust capital program in 2017. Please turn to slide 12.

Our leverage ratio at the end of Q3 was 3.86 times, which is the trailing 12 months pro forma, including run rate cost synergy. We expect a modest increase in the leverage ratio as we move forward over the next two quarters, which is due in part of the substantial CAF II true-up amount that impacted EBITDA in the fourth quarter of 2015.

We have a healthy cash balance, strong liquidity and a manageable maturity schedule. In 2017, we have approximately $500 million in maturities, and slightly over $700 million in 2018, the majority of which is due in Q4 of 2018. Net debt is $17.6 billion.

And existing liquidity together with ongoing cash flow from operations will enable us to meet these maturities and reduce additional debt and leverage over time. I want to reiterate that we are very focused on delevering the business.

On slide 13, our trailing 12-month dividend payout ratio was 54%, which remains one of the most attractive in the telecom sector. The board has declared a common dividend of $0.105 per share for the fourth quarter of 2016, payable December 31. We will also pay the regularly scheduled dividend on our preferred shares on December 30.

Please turn to slide 14. We are refining 2016 guidance as follows. Fourth quarter adjusted EBITDA to be $1 billion or more. Full-year capital spending of $1,250 million to $1,275 million. Cash taxes are expected to be a refund of $100 million to $110 million. Cash pension contribution will be in the range of $10 million to $15 million.

We anticipate interest expense of $1.53 billion to $1.54 billion. For the purposes of our adjusted free cash flow guidance, interest related to the CTF transaction is excluded from Q1. The quarter we didn't yet own the asset, the $1.34 billion to $1.35 billion would be the interest expense that would correspond to our free cash flow guidance.

And we anticipate 2016 adjusted free cash flow to be in the range of $920 million to $950 million. Lastly on slide 15, formal guidance for 2017 will come in February after we've completed our planning for the year. In the meantime, we are providing an outlook for items where we have visibility.

We anticipate 2017 adjusted EBITDA to be $4 billion or higher. As mentioned, capital spending is in the range of $1.2 billion to $1.3 billion, and cash taxes should be near zero. I'll now pass the call back to the operator, who will open the line for questions..

Thank you. We'll take our first question from Batya Levi with UBS. Please go ahead..

Okay. Thanks. A couple of questions. First one on the broadband side. You lost 99,000 subscribers versus, I think, 77,000 in the prior quarter. You had – you've mentioned that gross adds are improving in the acquired territories.

Can you provide a bit more guidance, why did we see accelerating losses in – altogether, I understand that there was some disruption on the legacy side, but I think the reduction is higher than we thought about? Then second on the revenues.

I believe a year ago when you closed the Connecticut deal, you had mentioned that you're taking – there was a bit of disruption on the revenue line and you're taking precaution not to repeat that with this acquisition.

So can you talk about what is not going as planned and why you're deciding to make these operational changes, a little bit more – providing more specifics around it? And just one final one, a quick follow-up. On the integration expense, it had been elevated for the last two quarters.

Now that process is done, can we assume that expense goes down substantially? Thank you..

Sure, Batya. I'll start and Perley will probably jump in on that. So on the broadband side, probably the biggest change from last quarter was on the legacy side, where we did see those losses. The biggest impact for both the CTF side and also the legacy side was when we on-shored our call center.

That remains probably 55% of our sales channel in any period. And as we brought people on it created some disruption and lack of performance in that area. That really was, probably, the biggest issue. I think we were disappointed that we were not able to accelerate sales further on the CTF side.

We certainly started in what is usually a fairly slow period for us, but we didn't see as good performance as we hoped. We're starting to see, as I said, improvements in October, but it's too early to call the fourth quarter whether or not we're going to get there this month or next month or really December.

We'll have a lot better visibility as we execute on our fourth quarter offer in November and December. On the revenue side, we absolutely took the precautions that we talked about and we locked down the ability for the variable around migrations that occurred in Connecticut.

So, we have not seen that happen, I think we've been very successful on that front. The real – where we're not being successful was on adding the gross adds on the subscriber side on CTF, that's really where we're making the changes on everything from product offers to marketing tactics and channels.

And we're – as I said, we're starting to see improvements on that. So I expect as we improve the trends on the FiOS product set in CTF, we'll start to see much better improvement on the revenue trend. And then on the integration side, we did spend extensively to really onshore our call centers much faster than originally planned.

Our original plans were to have that happen through – slowly through the balance of the year. We spent a lot of money actually around training redundant resources to bring that back in. We're expecting to see integration spend trail off as we get into the fourth quarter.

And then finally, as we looked at operating the business at the expanded scale, and the ability to use different offers and look at the markets as we were originally constructing them, we felt that we would be much more efficient because the new markets are very homogeneous when it comes to the product sets that will be offered.

We can take advantage of the scale around the markets as well as that standardization on what the product offers will be in Texas, Florida and California. And we looked at our normal business, our legacy business, we started to see that we will be gaining a lot of benefit from taking out the duplicative cost structure there.

So we started to look at it maybe two months ago, three months ago and then we refined our plans and adjusted it accordingly over the last 30 days to 60 days..

Okay. One follow-up on the broadband side if I may.

Would you be able to give us the breakdown in terms of the losses on the legacy footprint versus the acquired? And maybe just specifically on the FiOS side, I think you had lost about 78,000 subscribers last quarter, how was that in the third quarter? And then maybe a bit more color for October would be helpful..

Well, I'll start with October. We saw an improvement on the gross adds in Q3, but that was really from virtually no marketing in Q2. What we started to see already in Q4 was a step-up comparable to what we saw in the whole third quarter. So a material change.

And we expect as we introduce our holiday offer, which is really slated to hit the markets before Thanksgiving over the next week or two weeks. That we'll see improvement in performance even more.

Probably the single biggest improvement, though, was getting to the point where 4,000 new reps that came into the company as we on-shored, were selling effectively and efficiently using the tools. And you can't fully train everyone in that first month or two months.

And we made a trade-off that accelerated that to improve the customer experience from an offshore perspective to onshore. But the trade-off really was that they weren't as good at selling initially and that's improving each and every day.

So the combination of the enhanced offer that we're putting to the market as well as the improved competency, did see the trends continue to improve steadily in the fourth quarter..

Okay. Thank you..

Yeah. Just to make sure I had your question correct.

I think you were asking what was the breakout between legacy and CTF Q2 versus Q3 on broadband?.

Right..

Yeah. So just to give you that flavor, we've lost about 100,000 broadband customers at the end of Q2 and so it's (35:08) on CTF. And we did see an improvement of that from a loss of 100,000 to a loss of 75,000, so that was consistent with what we had messaged a few weeks ago.

On the legacy side, we had positive about 25,000 broadband customers in Q2 and that number was a negative 25,000 in Q3.

That was the swing we're really seeing, which was as I discussed, was really related to kind of the call center conversion and the loss related to that with respect to gross adds, and then we had some churn impact with our revenue initiative..

Okay. Thank you..

We'll go next to Phil Cusick with JPMorgan. Go ahead please..

Hey, guys. Thanks. A couple of follow-ups. Can you repeat for me the BDS losses in broadband? And, as we think about this, can you just help me understand. So, last quarter, we talked about exiting more than normal run rate 3Q, now we're exiting more than normal run rate 4Q.

Is this an issue of attention and customer service or is it customers are not responding to your marketing, because maybe of some of the issues that happened when the deal closed. And, second, if I can follow up as well on the integration side, can you give us an estimate for where we should think of that number in 2017? Thanks..

Yeah. Phil, I think, certainly, as we probably entered the early part of the third quarter, we were still dealing with some of the perceptions in the market. But I would say that that's not the problem right now, it's really about execution in the quarter. So, we focused, as I said, like a laser on really going after that.

And, we're seeing improvements in both our alternate channels as well as our direct channels. And direct channels is the area that probably had the biggest opportunity to improve. And our teams there have been really working on that nonstop as we work through the quarter. So, I do think that customers will respond to the marketing offers.

I do think that our close rates and our sales efficiency will improve steadily throughout the quarter. And, that was probably the bigger issue of the two that you question..

So, on the integration – Phil, to answer your question on integration 2017, it should be de minimis if not zero.

There will be a handful of circuits that we're still migrating, but the – all of the on-shoring work, the training work, the overlap work, all of that will have subsided by the end of Q4 and it's just some residual circuit conversion work that – that's done on a customer by customer basis..

Okay. If I can ask. Sorry, go ahead, Dan..

Could you repeat the first question because I thought you said something about BDS?.

I just didn't hear. I actually didn't say anything about BDS, but as long as I was going to follow up on it, are you still confident in the numbers you put out a few weeks ago, because one of your peers has talked about as they got – dug into the numbers, it looked worse than the original 11% that we talked about? Thanks..

Yeah. The only information we have is the factsheet, Phil, and we're confident on the numbers on the factsheet. I've seen some folks speculating on other things that might be in the order, no one has visibility into that at this point. The only thing that the FCC has put out is the factsheet at this point.

If others have different exposure that might be just due to the nature of the assets they have whether it's more IXC or whether it's more CLEC exposure, I'm not sure, but we feel good about our numbers..

Got it. Thanks, guys..

We go next to Simon Flannery with Morgan Stanley. Go ahead please..

Hi, it's Spencer for Simon. Thanks for taking the questions.

Just a quick clarification, I think you guys called out $14 million of temporary EBITDA and I think $26 million of revenue losses in 2Q that will recover, is that already reflected in 3Q results or is the bulk of that still to come? And then second, I think if we look at last quarter, on that (39:09) EBITDA, your leverage is now close to 4.4 times, is that the starting point we should use when you think about your delevering plans? Thanks..

I'm not sure I follow the first question that you had on the numbers you were throwing out there, but it's about the $12 million decline related to the one-time recognition of CAF revenue in the second quarter?.

I was thinking – no, if I look at your 2Q slide deck correctly, you called out $14 million of EBITDA that recovers over time, I wasn't sure if that was already in 3Q or if that's still to come?.

That was related to the late fees. So there were – there was a step down of regulatory revenue, which we were expecting and so regulatory revenue is more stable. There was the incoming of the late fees, which we had messaged in Q2 and saw them in Q3, which that helped to offset the $20 million reserve adjustment that we took on the CTF customers..

Okay, great.

And then in terms of your leverage, is 4.4 times the right starting point?.

Well, I mean our current leverage is 3.87 times. So that's where our leverage is today. We do expect it to increase, but as I said, we're very focused on deleveraging the business, we're very focused taking cost out of the business and very focused on making sure we have all of our resources aligned around the growth sides of the business, so..

Okay. Thank you..

We go next to David Barden with Bank of America. Go ahead please..

Hey, guys. Thanks a lot for taking the questions. I guess, I mean just to kind of address the elephant in the room, with the stock at 10-plus-percent yield, everyone, it seems like the market is really suggesting that either Frontier will choose to cut the dividend or will have to cut the dividend.

And I think that there is really three stories that go along with that. Number one would be, Perley, that you came in and John left and somehow that had something to do with new eyes coming in and may be having to cut the dividend.

So if you could kind of talk a little bit about what you think your capacity to keep paying the dividend and the commitment of the company overall is to it, from your perspective, will be great.

The second issue on the have to cut, seems to be that – we've got about a, call it, $250 million midpoint synergy run rate by next year, prorate that over the year, it's about $125 million of benefit.

And you've given this $4 billion or better guidance number, which leaves out there the possibility that everything outside synergies could come down another $125 million. And then when the synergy start to peter out, then the business is still declining at $125 million a year and we don't – and then we put more pressure on the dividend.

So could you kind of reconcile a $4 billion or better guidance number for next year relative to the $4 billion run rate you have right now given that you think all the synergies come through? And the final piece, I think, to this leverage question that just got asked, there's a lot of confusion about the 4.5 times leverage test that goes along with the restricted payments basket and whether you can or can't pay the dividend and when that occurs in the future if at all.

Could you talk directly to that calculation and how that impacts, how we should think about the dividend being covered? Thanks..

So, let me just start, David, but I think most of the questions are probably going to be for Perley. But from my perspective, when it comes to that question on the dividend cut, we don't see that at the same risk that others are obviously factoring in.

From our perspective, we have ample ability to control our cost structure, we're executing on that even as we speak today. We'll be driving that through the fourth quarter into the first quarter and then try and accelerate the additional synergies even faster.

But more importantly, we're working to really change that revenue line item and that's really what ultimately is going to solve that issue that you highlighted.

And when you look at changing the CTF statistics on performance, which is what we're all focused on right now, you look at the substantial opportunity on the commercial side, which we've spent a year really building the funnel and the new properties.

And the new properties, quite frankly, have much more opportunities on the commercial ones than our legacy property. And then you look at the investments that we've made to enable better performance on our broadband side. Each one of those is a unique opportunity that we can use to drive incremental revenue and start to really move the EBITDA line.

I think you saw in this quarter we really are focused very heavily on making sure that we heard loud and clear from different investors over time that we've not been active in adjusting our cost structure, and we really went after it with a gusto and we'll continue to do that.

And if we see further pressure on the revenue side, we'll make the right decisions on the cost structure to really offset that. So, I wanted to get that in before Perley really gave you his point of view coming in..

Well, I'll talk. I think you had a couple of questions really there about kind of EBITDA and leverage. I think on the – 2017, we wanted to give some numbers just so people could frame 2017 and how we're thinking about 2017.

And obviously we're in the middle of our budget process and we have to take our budget to the board and so we'll give our formal guidance as we get to the beginning of 2017, we'll release our earnings. But the – I think I've been here a couple of months now.

There's definitely a need to improve the execution of the business and there's definitely a need to improve our financial profile of the business, absolutely. And so, the focus is definitely on cost and taking cost out of the business and we have an acute focus on that.

And we have to make sure that every dollar that we're spending is really going toward our growth initiatives, that's capital dollars, that's expense dollars, even integration dollars and because we are very much focused on delevering the business.

Our leverage must be – our leverage will not go over above 4.5 times, it needs to stay below 4.5 times, and our target leverage is below 3.5 times. So, that's what we're focused on is improving the expense profile, the revenue profile of the business going forward..

Thank you. We'll go next to Greg Williams with Cowen Group. Please go ahead..

Great. Thanks for taking my questions. Just a quick question on the guidance. It looks like you brought up the adjusted free cash flow by midpoint-over-midpoint $72 million and you gave a little bit more color on slide 14, looks like CapEx is coming down $33 million that will help.

But then the big boost would be coming from, looks like a refund in taxes by close to $100 million. So essentially the step-down after those two factors.

And is that step-down effectively the revenue and margin decline that we're talking about here or are there any other moving parts that I'm missing? And then the next question is just on the organization structure. I was hoping you can provide just a little bit more color on what exactly that entails.

And it sounds like there is managers in each state or each region. And how many regions are there? And something, it's customer facing, so is this a sales reorg, and just help me visualize how this saves costs. Thanks..

Let me start with the org structure question, Greg. Historically, Frontier was organized around a regional structure, each one of the regions had its own resources that included marketing, finance, engineering, human resources. And in doing that, we – when we were a much smaller entity, it really did serve us well at that point in time.

The more we looked at it today, the less differences there are in a lot of the markets and the way we're going to market whether it's around a Vantage product or it's around FiOS or it's around next-generation broadband products.

So, when we looked at it, we did a really a trade-off on it, so we've essentially eliminated all of that redundancy in the organization. The impact is approximately 1,000 individuals that will be leaving the organization, and that translates directly into cost savings.

And the nice part about it too is that the enhanced focus on commercial as well as consumer and Frontier has historically been a very consumer-focused organization.

We've done well on the commercial side, but I really believe we can do much better with more focus, more attention and really putting the resources on those opportunities and making it, that's what they do every day when they get up and they come to work, all they're trying to do is grow the commercial revenue base. So that's really what we've done.

It does change the focus on the field operations to really be engaged with the community as well as providing excellent service to customers and being that bridge, but really sales for both consumer and commercial are more centralized in a way that we can apply better resources and do it in a more efficient manner..

And on your 2016 guidance question, what we've tried to do is just lay out the pieces, so it's very easy just to lay them in in terms of the model and understand where we're going to end the year. So I think what you've communicated in your question was basically, yes, those are all the piece parts we should get to. It's where we need to get to..

Okay. Thanks..

We'll go next to Matt Niknam with Deutsche Bank. Go ahead please..

Hey, guys, thank you for taking the questions. Just two if I could.

One, on revenues, is there a timeframe you have in mind for ultimately getting to revenue stability both in the CTF properties as well as on a consolidated basis? And then secondly, just on the gross adds in the CTF properties, maybe if you can give us a little more color on what's behind it, what you can do to stimulate activity through new offers or pricing? And really what I'm getting at or what I'm trying to figure out is, is this a function of penetration having plateaued in these FiOS markets or accelerating or worsening cable competition? Thanks..

Yeah, Matt, I'd say, on the second part of your question, I don't believe that that's an accelerating competitive. I really think this is our execution issue and it's ours to fix and we're fixing it. So I think you'll see us improve from a revenue stability as we do a better job of executing going forward.

And I'm convinced that as we get those trends back to where we know they can be, because it is a great product set and it's very competitive, obviously, in the market that we'll start to see that stability.

I think the key areas that we're focusing on, if you look at the commercial opportunity in these areas, we think that is a very large opportunity that we haven't even begun to tap yet. And people are always looking for a different way of solving their needs at their businesses. And we're starting to build robust pipelines around that right now.

The sales pipelines tend to build over a six-month to nine-month period and then you start to really harvest all of the fruits of those efforts. So, those will all be incremental growth opportunities for us in these markets especially in the CTF.

I think on the legacy side, what we need to do is really do a better job of selling in the areas that we've upgraded or open for sale. And those are in the speed upgrades, as well as the CAF opportunities.

When you look at the amount of CAF homes that we'll have opened for sale by the end of the year, that is a really good opportunity for us to really help change the trends on the legacy properties.

In addition to that, we are, as we've talked about on previous calls, opening markets throughout the end of this year and into next year around the Vantage platform. Vantage is not only video, but it's really enhanced broadband speed and offers different commercial opportunities in the market.

So we'll be capitalizing on all of those things as we go forward.

One final thing that will help us too, I think, is really as we changed the product availability in some of the copper markets for the new states, we go from essentially a 6 meg product that hasn't been opened for sale in years to a 50-plus-meg product that's very competitive in the marketplace and offers customers a choice that they never had before.

So we think that's an exciting opportunity. When you put all those things together, it really does give us the leverage we need to really push on the revenue side, but it really does start with improving in the CTF area and that's where the laser focus is on the whole team right now..

And so is there a line of sight in terms of maybe seeing when you can get to stability either in CTF or consolidated or is it too early to tell at this point?.

I think that the driving subscriber (52:15) metrics on the FiOS side really gets us pretty close to there and we're hoping that happens in the CTF properties as we get into the first quarter. And then the other opportunities are really about how well we execute on those.

And as you saw, this was probably one of our best quarters in legacy, we've done a good job, I think, of managing the base as well as taking advantage of some pricing opportunities. We'll continue to be opportunistic on that.

And that combined with some of those other opportunities that I mentioned, are what will help us, in totality, get to the revenue stability. But we'll still have – wireless backhaul will be there.

There will still be headwinds that we're dealing with, but we're pulling levers that in some cases, we've never had the opportunity to pull before and we're looking forward to seeing those impacts on the revenue stream..

Got it. Thank you..

I think we have time for one final question and that will come from Frank Louthan with Raymond James. Go ahead please..

Great. Thank you. So, when do you – will we start to see the revenue benefits from the 800,000 of broadband customers that you have, that you have upgraded? It's kind of my first question.

And then, I guess, a two part for Perley, any changes or discipline that you're bringing to the organization that you think we can start to see some improvements in? What sort of things you're looking to do differently? And then at what point would you consider a reverse stock split, seems like something that could have some value and maybe make it more attractive to a broader level or broader expansive investors?.

Frank, on your first question, those changes went into our – into the network and into the systems and became open for sale really towards the end of third quarter. So, we'll start to see the benefits of those ongoing from here.

We should see that higher ARPC sales, and hopefully a increased amount of sales because it does make us more competitive in those markets. So you should expect to see the benefits of that going forward..

Hi, Frank. The – I would say, as far as change in discipline, I'm going to work a little bit differently. As Dan said, the company has been in an integration mode for three years and is out of integration mode and it now is into operational mode, and we need to find operational excellence and sales and marketing excellence.

And so, it is about improving the execution of the business, it is about being very acutely focused on taking costs out of the business, it is about incremental dollars that we're going to invest or dollars we're going to invest must go against growing the top line.

And it's a – just a – this seems to be a very disciplined approach around those things as we're now out of integration mode into full blown operational. As far as the reverse stock split, I mean, it's not on the roadmap, it's nothing I'm even considering or thinking about or even looked at.

So, it's – right now it's a very maniacal focus on running the business and getting our results improved..

Okay. Thank you..

You're welcome..

In closing, we continue to make progress on improving sales and operations in the new Frontier. Just two quarters ago, we doubled in size and changed our company. And I'm proud of the accomplishments of our teams, and very excited about the new operations structure and the benefits it will bring in many areas.

I want to thank you for participating in our call, and we look forward to delivering improved results for our customers, our employees and all the stakeholders..

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation..