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Frontier Communications (FTR)

Q4 2010 Earnings Call

February 23, 2011 9:00 am ET

Executives

Gregory Lundberg -

Mary Wilderotter - Chairman, Chief Executive Officer and President

Donald Shassian - Chief Financial Officer and Executive Vice President

Analysts

Christopher King - Stifel, Nicolaus & Co., Inc.

Gray Powell - Wells Fargo Securities, LLC

Daniel Gaviria - Morgan Stanley

Michael McCormack - Bear, Stearns & Co.

Batya Levi - UBS Investment Bank

Scott Goldman - Bear Stearns

Frank Louthan - Raymond James & Associates, Inc.

David Coleman - RBC Capital Markets, LLC

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Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Frontier Communications' Fourth Quarter 2010 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Greg Lundberg. Please go ahead, sir.

Gregory Lundberg

Thank you, Lisa. Good morning, everyone. The purpose of this call is to discuss 2010 fourth quarter results for Frontier Communications, which were released this morning and are available on our website. We anticipate the Form 10-K will be filed later this week.

On today's call are Maggie Wilderotter, Chairman and Chief Executive Officer; and Don Shassian, Chief Financial Officer. During this call, we'll be making certain forward-looking statements in particular on matters related to 2010 results, 2011 results and estimates. Please review the Safe Harbor language found in our press release and SEC filings.

On this call, we'll be discussing GAAP and non-GAAP financial measures as defined under SEC rules. In our earnings release and on our website, www.frontier.com, we've provided a reconciliation of non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP. Please refer to this material during our discussion

I'll now turn the call over to Maggie.

Mary Wilderotter

Thanks, Greg, and good morning, everyone. We appreciate you joining us today as we discuss the fourth quarter and full year 2010 results for Frontier Communications Corporation. Our Q4 revenues were $1.4 billion and adjusted operating cash flow or EBITDA of $622 million represented a margin of 46%. Our dividend payout of free cash flow for the six months since closing was 67.5%. These results are a solid achievement as we continue to transition the acquired properties to our legacy Frontier standard.

Our results reflect the investments we made in people and product to transform the under-invested and under-marketed properties into high-performance, broadband-rich assets. In 2011, we expect our quarterly metrics and financial results to accelerate from Q4 2010 levels as broadband expansion opens new opportunity and as the Frontier team begins to reap the benefits of our local engagement sales advantage. Our focus on the customer is keeping our legacy results strong and is changing the competitive game in the acquired properties.

I'd like to take a moment to touch on each of these key value drivers for Frontier: people, products and profit. On the people side, we have met with all employees in January to outline our performance-based 2011 goals. Our three top goals are: to keep and increase customers on our products, to accelerate high-speed Internet deployment and net data subscriber growth and to improve and simplify the customer experience. Frontier's home-court advantage is that our 100% U.S.-based employees are engaged at the local level. Each and every action and customer touch-point builds deeper relationships, which improves Frontier's results and helps the community as well. Our employees are motivated and compensated on putting the customer first.

Here are a few examples. We've improved the customer experience by expanding call center hours and by eliminating interactive voice response options. Compared to Q3, the percentage of calls answered in less than 60 seconds is up eight percentage points to 84%. Since closing, we have improved our ability to resolve customer issues quickly with a 25% drop in call transfer rates, and customer escalations have dropped 55% in West Virginia and 27% in Frontier's 13 markets.

We have also reduced the number of calls outsourced to third-party vendors by 20% since close without adding any divisional customer service headcount. We introduced full High-Speed installs by our tech in the acquired properties and the percentage of High-Speed net adds installed by techs is over 75% in many of our new markets. We're pushing to drive up the usage of full installs throughout our properties. Since launching this program, we've seen a 65% reduction in trouble tickets. Our employee referral sales channel called Take the Lead, generated $11 million of annualized revenue in Q4 2010. We've seen leads double from under 10,000 in July to more than 20,000 per month in the fourth quarter. And we expect our 2011 Take the Lead results to be 25,000 per month.

Local engagement is in full swing. Our general managers are active on chamber board, employees volunteer countless hours with local organizations and Frontier has sponsored dozens of events like the Fire on the Mountain Chili Cook-Off in West Virginia to the Dakota County Fair in Minnesota. Each event is an opportunity to bond with the community and to sell products and services.

Shifting to products. Frontier's product goals are to be the communications provider of choice in our market, to build strong customer loyalty to reduce churn and to increase the number of products that residential and business customers take from us. To achieve this, we are constantly striving to simplify pricing and introduce new products and services. Customers learn about Frontier products through local engagement, which is how we're driving down churn in the acquired properties and increasing reoccurring customer revenues. Our broadband expansion is a core product focus for Frontier and a critical part of our overall strategy. Since taking ownership, Frontier significantly expanded broadband in our new market, which now stands at 70% availability. We build broadband to an additional 240,000 homes and opened more than 75,000 additional homes through enhancing existing network capacity.

In 2011, we plan to make broadband available to an additional 400,000 to 450,000 homes. It's important to note that the vast majority of the homes that were newly enabled in Q4 occurred in December. As a result, our Q4 High-Speed net additions do not reflect our ability to convert broadband opportunity to sales. We expect to see momentum on penetration in late Q1 and in June 2, 2011. Overall, Frontier has 52% availability of six megabits per second service and 64% availability of three megabits per second. In the acquired properties, our three megabits service is now available to 63% of the households, putting us well on our way toward our SEC commitment of 72% availability by year end.

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