Ladies and gentlemen, thank you for standing by, and welcome to the Frontier Communications Third Quarter 2019 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Luke Szymczak. Thank you. Please go ahead, sir. .

Thank you, Gigi. Good afternoon, and 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 Sheldon Bruha, Executive Vice President and CFO. The press release, earnings presentation and supplemental financials are available in the Investor Relations section of our website, which can be found at frontier.com/ir. .

During this call, we will be making certain forward-looking statements. Forward-looking statements, by their nature, address matters that are uncertain and involve risks, which could cause actual results to be materially different from those expressed in such forward-looking statements.

Please review the cautionary language regarding forward-looking statements found in our earnings press release and other SEC filings. .

On this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings press release for how management defines these measures, certain shortcomings associated with these measures and reconciliations to the closest GAAP measures. .

I will now turn the call over to Dan. .

Thank you, Luke. Good afternoon, and thank you for joining us. Please turn to Slide 3. .

Third quarter revenue of $1.997 billion declined 3.4% sequentially. Consumer revenue of $1.02 billion declined 2.5% sequentially, driven primarily by customer losses. Commercial revenue of $882 million declined 4.3% sequentially with a $17 million sequential increase in reserves for wholesale billing disputes contributing to this decline.

The increase in consumer customer churn to 2.24% reflects, in part, less favorable seasonality in Q3 relative to Q2. Consumer ARPC of $88.45 declined slightly sequentially. Adjusted EBITDA of $804 million declined 8.8% sequentially. .

Several factors contributed to this performance, including a $70 million decline in revenue and an $8 million increase in adjusted operating expenses. Within the $70 million decline in revenue was the increase in accounts receivable reserves related to our commercial wholesale business.

And there were normal third quarter seasonal impacts relating to storm activity, such as increased overtime. As previously announced, we have entered into a definitive agreement to sell our operations and assets in Washington, Oregon, Idaho and Montana for $1.352 billion. We continue to anticipate closing by the second quarter of 2020. .

Please turn to Slide 4. Total broadband net losses were 71,000 in the third quarter. We achieved a sequential improvement in fiber net losses with only 1,000 in the third quarter. However, consumer copper losses of 52,000 were worse than the second quarter. .

In copper, although we experienced a sequential increase in gross additions, this was offset by a sequential increase in churn. And we continue to manage this business for decline. .

Fiber broadband gross additions increased sequentially in the third quarter, and we also had a slight sequential improvement in fiber broadband churn. With the completion of the upgrades of the fiber network to be 10-gigabit capable, we have increased our emphasis on selling at higher-speed tiers.

As a result, of the 500 megabits offering that I discussed in our second quarter call, over half of the fiber broadband gross additions in Q3 were at speeds in excess of 250 megabits. In contrast, the majority of the fiber gross additions in the third quarter of 2018 were in the 100 to 250 megabits range.

And with the completion of our network upgrade, we are also seeing an increasing number of existing fiber customers moving to higher speeds. .

In the fourth quarter, we have introduced a more aggressive promotion for a 500-megabit service, with an easy upgrade path to Gigabit broadband. As a result, we anticipate further upward speed migrations in the fiber base of customers. .

Please turn to Slide 5. Customer churn in consumer continues to be at an elevated level, and it increased sequentially and over the prior year. The third quarter can have higher seasonal pressure than the second quarter. And in comparison with 2018, we had a larger number of customers rolling off acquisition-related promotions this year.

The number of customers scheduled to roll off these promotions in the fourth quarter is less than 1/3 so we anticipate less pressure in Q4 as we discussed on the second quarter earnings call. .

Turning for a moment to commercial. In commercial SME, we continue to see pressure in voice, which represents approximately half of this revenue. We also have continued further expansions of our SD-WAN products. .

In wholesale, in addition to the impact of the $17 million increase in accounts receivable reserves for wholesale billing disputes, we had pressure concentrated in TDM wireline products and, to a lesser extent, Ethernet products as well as a decline in switched access. We enabled 18,000 additional CAF II locations in the third quarter. .

As I mentioned in the second quarter call, in August, the SEC released the notice of proposed rule-making for the successor to CAF II, which is called the Rural Digital Opportunity Fund. This would dedicate over $20 billion over the course of the coming decade for broadband at up to gigabit speeds in rural areas.

We have submitted our comments in the proceeding, as have other parties. While it remains premature to speculate on the potential economics of the new program, Frontier will continue to participate in the proceeding, and we expect to participate in the RDOF auction. .

I will now turn the call over to Sheldon. .

Thank you, Dan, and good afternoon, everyone. I will update you on our third quarter financial performance. Please turn to Slide 7. .

first, we had a goodwill impairment of $276 million, both pre and posttax. As a result of this charge, our net goodwill balance as of the end of the third quarter has been written down to 0. .

Second, we recognized an additional $30 million loss on the anticipated sale of our operations and assets in Washington, Oregon, Idaho and Montana, which was largely attributed to the business-as-usual CapEx for the 4 states during the period and the lack of any associated depreciation in the period, given their designation as assets held for sale.

This will continue to occur quarterly until closing. .

And third, we had restructuring and other expenses of $27 million, which compares to $31 million in the second quarter. Net cash from operating activities in the third quarter was $246 million. The decline from the second quarter level of $575 million was primarily a result of the cyclicality of cash interest payments.

This reflects our normal quarterly pattern of our semiannual coupons, as cash interest payments are significantly higher in Q1 and Q3 and lower in Q2 and Q4. We had a sequential increase in operating expenses in the third quarter. Operating -- adjusted operating expenses were $1.193 billion, a 0.7% sequential increase.

Among the drivers were $10 million higher USF expense from an increase in the FCC-mandated USF contribution rate as well as other seasonal and onetime items. .

Nonetheless, we continue to achieve sequential improvements in other important areas such as content expenses. We maintain an intense focus on expense management balanced with selective investments. For example, we anticipate further investments in marketing spend in the last quarter of the year. .

Third quarter adjusted EBITDA was $804 million, a sequential decline of 8.8%. The adjusted EBITDA margin of 40.3% declined sequentially. And finally, the trailing 4-quarter operating free cash flow was $563 million. .

Please turn to Slide 8. Looking at the components of revenue, data and Internet services revenue was down $35 million sequentially, driven by declines in commercial wholesale, which I'll discuss in a moment. Voice and video services revenue also each declined sequentially.

Voice revenue had an $11 million benefit from USF driven by the higher USF billing rates that I mentioned earlier. The decline in video revenue reflects the impact of our strategy to deemphasize video sales, which contributed to approximately 40,000 net video subscriber losses in Q3 and 46,000 in Q2. .

Looking at the view of revenue by customer type. Consumer revenue declined 2.5% sequentially, with data, voice and video contributing to the decline. The consumer data declines were primarily related to lower copper broadband units, which decreased by 52,000 in the quarter. Commercial revenue was down 4.3% sequentially.

The pressures were higher in wholesale, in part, due to the additional $17 million of accounts receivable reserves for billing disputes. Other factors were continued declines in TDM circuits and a decline in Ethernet sales. Regulatory revenues declined by 4.2% sequentially. .

Please turn to Slide 9. Monthly consumer ARPC was $88.45, a sequential decline of $0.23. We continue to focus on base management as customers migrate off promotional packages. Offsetting this are the mix changes from ongoing declines in the number of video customers. .

Please turn to Slide 10. Capital spending in the third quarter was $318 million. The focus areas of our capital spending remain consistent with our prior quarters. As Dan mentioned, we completed the deployment of our 10-gigabit capability across our fiber footprint.

This will support our commercial activities by enabling an even more robust portfolio of Ethernet services and providing a road map for 5G backhaul. It also upgrades our consumer-based -- fiber-based broadband service capabilities.

We have begun to market higher-speed broadband services more aggressively, and fiber subscriber trends have begun to benefit from this. .

We continue our build-outs for the Connect America Fund, or CAF, with builds completed to 526,000 locations as of the third quarter. We are also building fiber to the home in certain rural markets to a total of 19,000 locations, and we are leveraging state funding programs for these builds.

In addition, we are on track to build fiber to more than 30,000 greenfield locations this year as normal -- as a normal ongoing element of our capital spend. And finally, in the third quarter, we spent approximately $3 million in capital for preparations for the sale of the Northwest operations. .

In conclusion, I'd like to reiterate that the Finance Committee of the Board of Directors continues to evaluate Frontier's capital structure. This includes considering, evaluating and negotiating capital markets financing transactions and other strategic alternatives. Frontier remains committed to reducing debt and improving its leverage profile.

Importantly, as of September 30, the company had total liquidity of $683 million, which represents the unrestricted cash balance at the end of the quarter and includes a draw of approximately $500 million on the revolving credit facility during the quarter. .

I will now turn the call back over to Dan for concluding remarks. .

optimize our business and leverage our best assets for future growth while managing the elements of our business in secular decline. We're focused on executing on cost efficiency programs and on selective capital investment. We also remain focused on meeting the needs of our customers.

We have strong capabilities and are committed to innovation and the development of new solutions, such as we are delivering with a new emphasis on higher broadband speeds and our new SD-WAN products. .

Thank you for joining the call today, and we look forward to updating you following Q4. .

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..