Luke Szymczak - VP of IR Dan McCarthy - President and CEO Perley McBride - EVP and CFO

Batya Levi - UBS Phil Cusick - JPMorgan Greg Williams - Cowen and Company Josh Frantz – Bank of America Merrill Lynch Scott Goldman - Jefferies Frank Louthan - Raymond James & Associates Matthew Niknam - Deutsche Bank

Welcome to the Frontier Communications Fourth Quarter 2016 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Luke Szymczak. Please go ahead.

Thank you, Lisa and good afternoon. Welcome to the Frontier Communications fourth 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 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.

Thanks, Luke. Good afternoon and thank you for joining Frontier's fourth quarter 2016 earnings call. Please turn to slide 3 of the deck. As you can see, our reported results were impacted, as we aggressively treated the non-paying customer segment in our California, Texas and Florida states. As we accelerated this treatment program, we also focused on improving our operational execution. During the quarter, we made significant progress on a number of fronts in repositioning the business to deliver better customer experience and improved operational and financial performance. First, we completely reorganized our business structure with the creation of new consumer and commercial business units which will result in a more customer-centric approach, while reducing expenses and enabling a more efficient deployment of capital. We’re excited about the opportunities available to Frontier through an enhanced focus on our commercial segment which I'll discuss in greater detail later in the call. We have accelerated our $250 million synergy realization to the end of the first quarter of this year from the end of the second quarter, as previously announced. We’re also accelerating the realization of an additional $350 million in synergies, an increase of $200 million over previous expectations by more than one year from mid 2019 to early 2018 and planning additional cost reductions over the course of this year. We created additional financial flexibility by extending our revolving credit facility from 2018 to 2022 and by amending our term loan covenants and unifying them with the revolver. In the quarter, we intensified the cleanup of acquired California, Texas and Florida accounts. I'll discuss this in more detail in a few minutes. The cleanup had a negative impact on the quarterly financial results; however, absent this cleanup, we saw improved underlying trends in broadband additions in both our Legacy and our CTF market. Turning to speed improvements, during 2016, we upgraded 1 million households to 50 megabits or higher speeds. In the CTF markets, we upgraded approximately 200,000 copper-fed homes. And finally, our call centers returned to normal performance levels by the end of the fourth quarter after a disruption last quarter due to onshoring. I'll discuss this later in the call. Please turn to slide 4. Looking at our business priorities, while CTF subscriber trends are moving in the right direction, we must accelerate the pace through improved operational execution and expansion of certain distribution channels. Challenges in this area are a normal part of the integration process. In this case, the extended period of minimal marketing required us to reestablish sales momentum. As we increased marketing efforts in mid-November, we saw an increase in sales and that has continued into the first quarter. During the fourth quarter, we continued to improve our operational performance and our contact centers and in field operations. As a result, we felt we were positioned to launch an aggressive customer acquisition offer in the CTF market. This offer is coupled with rapid install commitment and we expect it to build momentum further over the coming months. As we have been building our sales momentum, we have been accelerating our expense reduction efforts to ensure our business is right-sized to market realities, reflects our revenue opportunities and maintains free cash flow. Please turn to slide 5. We have provided a time line of the account cleanup issue. As you can see, in anticipation of the deal close, Verizon stopped treatment of overdue accounts on February 1, 2016. We continued non-treatment of these accounts through July 20, as we worked through the cut over. We have been working through the account cleanup process since July 20. We began disconnecting non-paying accounts at the end of August and continued this through Q1. From an accounting standpoint, we began to reserve aging accounts in accordance with our normal policies in Q2 and then increased our reserves, as we discussed on the last earnings call. We began permanent disconnects and receivable write-offs in 3Q, continued them in 4Q and expect to complete them this month. Turning to slide 6, CTF account cleanup had a $45 million impact on fourth quarter revenue and we estimate less than a $25 million impact in first quarter revenue. We do not expect any further account cleanup impact beyond the first quarter and we’re now operating normally with respect to the acquired customer receivable. We completed this cleanup process this month. This was due to the backlog and the specific rules and customer treatment processes dictated by relevant franchising authorities. We’re taking steps to more aggressively manage costs in light of the longer timeframe needed to clean up this account group. Turning to slide 7, as I mentioned, CTF net adds, excluding the account cleanup impact, are on an improving trend. These figures are more representative of the true underlying trend in the CTF properties. We began to see improvements towards the back end of the quarter, as our operational performance accelerated and our marketing offers began to penetrate to targeted communities. We expect these trends to improve further due to the aggressive offer we recently launched and the improvements in key distribution channels we will be launching towards the beginning of the second quarter. We expect our net additions on key metrics in the CTF markets to continuously improve through the remainder of this year and expect to return to market share growth in the second half of the year. Turning to slide 8, you can see the improvement in Legacy broadband performance after it has been disrupted previously by integration activities. The trend improved throughout the quarter as our contact center performance normalized. In addition, we implemented an enhancement to our credit and collection processes developed during the CTF integration. This change will improve our pace of treating delinquent customers and enhance the collectibility of these accounts. The implementation of this new automated process will elevate involuntary churn in Q1 for the Legacy properties, but will be very beneficial as we’re more efficient at treating accounts receivable and reducing our bad debt exposure. Turning to slide 9, in the third quarter, our contact center representatives were still getting up to speed on our systems and our products and as a result, we saw underperformance. We’re now pleased to report that we successfully completed this transition. As a result, our close rates on broadband and video have improved in the first quarter. We’re implementing new processes and systems that will enhance our contact center performance further on tech support, retention management and acquisition presentation. These enhancements will continue throughout 2017 in various stages and we expect performance to continue to improve as a result. Similarly, our field operations are making significant progress. CTF jobs per day are now in line with our expectations. The teams are part of a cohesive ecosystem tied to contact center performance. As our centers improved, so has the field team's performance on f commitments met or service orders and trouble ticket. The one area that we continue to focus on is our California market. This has been primarily impacted recently by the unprecedented weather events that have unfolded this winter. We fully expect to be back to normal service levels as the weather improves over the coming weeks. Now turning to slide 11, we’re excited by the opportunities in commercial and have begun executing what we believe is a winning strategy. As I mentioned, in addition to reducing expense and allowing us to be a nimbler operation, the goal of our restructuring into two business units is to take a more customer-centric approach and this is a key driver of our commercial strategy. We deployed field sales teams where our network and market opportunity highlighted the greatest potential for market and wallet share growth. This focus on selling where we have highly scalable and robust infrastructure is capital efficient and allows us to have aggressive installation intervals that competitors will have difficulty meeting. As an example, we have mapped and targeted over 30,000 on net fiber-fed multi-customer buildings and footprint. In addition, we have substantial opportunity on copper-fed ethernet systems in other markets that are in addition to the fiber in those buildings. We have reorganized our sales teams around these opportunities. We have also enhanced our alternate channel relationships and launched a new channel dedicated to the smaller segment that will be an entirely new source of sales for Frontier. These were not focus areas for Verizon in the CTF markets and we expect to drive significant sales results as we build momentum. We have enjoyed stability in our SME customer base over the last several years; however, during this past quarter, we did see some weakness in our Legacy market. This was directly attributable to the disruption of our contact centers and sales channels during the previous quarter. The CTF SME segment was impacted by slightly slower sales but also the cleanup of aged accounts previously discussed. As you can see, we have significant number of targets in the Tier 2 and Tier 3 segments across the Frontier's footprint. Each area offers unique opportunity. Some are opportunities for market-share expansion, while others are more highly penetrated in our wallet share expansion target. The commercial sales team is laser focused, aggressive and designed to be a growth lever that will build through the remaining months of the year. Our carrier wholesale business remains focused on the opportunities facilitating partner solutions for the enterprise and wireless space. We did see some continued pressure in the wireless segment, as customers retire certain technology solutions and seek to lower their transport costs. However, we have seen robust demand for additional circuits and are very pleased with the order flow which will allow us opportunities to offset the headwinds created by the migration from TDM to ethernet solution. We believe our new organization, distribution strategies and focus areas give us the best opportunity to exploit opportunities in a very segmented and targeted fashion. This will be the most holistic and comprehensive approach we have ever deployed and we’re excited for the prospects and will continue to update you on our progress over the coming quarters. Now I'll turn the call over to Perley to review the financial results.

Thank you, Dan and good afternoon, everyone. Please turn to slide 13 and I will begin with the key financial highlights of the quarter. Fourth quarter revenue of $2.41 billion declined $115 million from the $2.52 billion reported in the third quarter. Customer revenue of $2.21 billion made up most of the variance, declining $109 million, while regulatory revenue of $199 million declined $6 million sequentially, primarily due to inter-carrier compensation volume decline, as well as the scheduled step-down in CAF-II transitional support. Adjusted EBITDA was $966 million which is below our expectation of $1 billion, due to the revenue decline and the newly-acquired properties in California, Texas and Florida. Our fourth quarter adjusted EBITDA margin of 40% increased about 40 BPs from the third quarter, driven by expense savings from our synergy and cost-reduction programs. We generated adjusted free cash flow of $316 million after payment of dividends on our preferred stock. Q4 free cash flow increased from Q3 mainly due to lower capital spending of $104 million and the cash tax refund of $81 million due to a carry-back of tax losses. For the year, CapEx of $1.259 billion and adjusted free cash flow of $921 million achieved Frontier's guidance targets. Turning to slide 14, Legacy customer revenue of $1.13 billion was down $27 million or 2.3% sequentially. There was an $11 million sequential decline in residential and a $16 million decline in business. Of the total $27 million sequential decline, $15 million was driven by voice, due to both residential and business access line losses for the current quarter, as well as the cumulative revenue impact of earlier losses. In addition to lower local services, we experienced higher rates of decline in long-distance and enhanced services, particularly in residential. Part of the remaining variance is driven by fewer broadband and video sales through the lack of marketing and the disruption from integrating the CTF properties that Dan discussed. The remaining variance is due to continued decline in wireless back haul which was $3 million and a one-time carrier settlement of $2 million. We continue to invest in our broadband and video capabilities and we expect these investments to contribute to an improved revenue trend in the coming quarters. Moving to CTF, customer revenue of $1.08 billion was down 6.9% from the $1.16 billion reported in the third quarter. This decline reflects the $45 million impact of account cleanup that Dan mentioned earlier, with the remaining portion of the decline resulting from negative net addition. Residential revenue of $637 million was down $65 million or 9.3% and $36 million of this decline was related to the CTF write-offs. In looking at the product view, video was down 8.3% sequentially in CTF, voice declined 5.6% and data and Internet was down 5.4%. While net adds are improving in both data and video, the units have a lower ARPC, as many of the gross additions come out initially at a promotional rate, resulting in lower sequential revenue which we will discuss in a moment. The $10 million sequentially decline in CTF other revenue is primarily related to the lower late payment fees as a result of the account cleanup and lower service activation fees due to free installation which was included in our promotions. Business revenue of $439 million was down $17 million or 3.7% and $9 million of this decline was due to account cleanup. In addition to declines in voice as a result of organic line losses and ancillary revenues, we also experienced some LD fraud losses in the CTF properties which have now been rectified. Similar to our consumer business, service activation fees were lower due to the free installation included in the promotional offer. As Dan discussed, the creation of our dedicated commercial business unit substantially improves our ability to differentiate our services for business customers and to tailor solutions to the unique needs of various segments of the market. While this is a more complex market, we believe we have the right strategy in place to capitalize on commercial opportunities. Turning to slide 15, residential ARPC in our Legacy markets was $63.19, down $0.22 sequentially. The principal driver of this increase was a slight increase in bad debt reserves at year end. To remind everyone, Frontier records bad debt as contra revenue versus operating expense. I don't believe this is a new trend in the business, as Legacy write-offs remain very consistent. In CTF, residential ARPC of $105.37 was down $3.32 sequentially. Excluding the receivables reserve for the account cleanup on a quarter-over quarter basis, ARPC was down $3.89. On a combined basis, our ARPC was $80.33, down from $82.34. Excluding the receivables impact it was $81.01, down $2.27. The lower ARPC is primarily driven by the loss of higher ARPC customers and replacing them with customers on promotional pricing. Additionally, as mentioned deactivations in Q4 were higher than expected, but we were also putting in place strategies and promotions to improve churn. Please turn to slide 16. Q4 adjusted operating expenses in Legacy declined 8% sequentially to $735 million, primarily due to improved compensation costs as a result of restructuring and lower over time. Adjusted EBITDA in Legacy was $546 million, up 6.4% sequentially, despite the decline in revenue. The adjusted EBITDA margin in Legacy was 42.6%, up from 39.2% in the third quarter. Adjusted operating expenses in CTF declined about $18 million sequentially or 2.5%. Decreases in content and compensation costs were offset a higher outside services due to the onshoring of the CTF contact centers that we have previously discussed. Adjusted EBITDA in CTF of $420 million was down 13.6% sequentially, primarily due to the revenue decline from the CTF account write-offs. This represented an adjusted EBITDA margin of 32% to 37.2%. We remain committed to right-sizing the expense base of the business and are focused on driving overall margins higher over time. Moving to slide 17, as Dan mentioned, we have accelerated the time line for our $250 million synergy realization to the end of the first quarter from the end of the second quarter of 2017. We’re also increasing the magnitude and accelerating the time line for realization of the next tranche of savings. We’re targeting $350 million in synergies, up from $150 million by mid 2018, a year earlier than our prior target of mid-2019. We will also continue to identify additional expense-reduction opportunities unrelated to the synergies over the course of 2017 and into 2018, with the objective of offsetting the declining trend in revenue. Our synergies and cost savings will be achieved through a number of initiatives, including enhanced discipline in managing video content at each renewal cycle, IT initiatives that will enable operational improvements and make us more productive, rationalization of our facilities and real estate footprint, exiting unfavorable leases and leveraging third-party services. Turning to slide 18, our adjusted free cash flow for the trailing four quarters was $921 million, with an adjusted dividend payout ratio of 52%, an improvement of 2 percentage points from the last quarter LTM payout ratio. On slide 19, CapEx in the fourth quarter was $299 million, down from $403 million in the third quarter as a result of seasonal capital projects rolling off and a normalization in spending as we move forward from the close of the CTF transaction. Total capital spending for 2016 was $1.259 billion, in line with the range we provided on our last call. Approximately half of 2016 capital expenditures were in support of growth initiatives, including broadband expansion, speed upgrades and fiber-to-the-home expansions. As Dan mentioned, we enabled over 1 million households with 50 mgs and higher speeds over the course of 2016, in addition to 200,000 new copper broadband builds in our CTF business. We have also added over 190,000 CAF-II households and 500,000 households in adjacent areas. Capital spending also included ethernet expansions, offering new services to business customers and additional IT capabilities to drive incremental revenue. We also slowed new video deployments as we evaluate the opportunities now available as technology in this area continues to evolve. The remainder of our capital spending is a combination of IT investments related to productivity enhancements and maintenance-related projects. Our capital spending plan for 2017 is in the range of $1 billion to $1.25 billion. This is a decline from 2016, as our larger size has enabled greater efficiencies, including better pricing in procuring goods and services. We also have more than adequate inventory on consumer devices and as mentioned, we’re scaling back our video build as we evaluate the opportunities created by the evolution of technology. With the new organizational structure, we have also revised the entire capital program and centralized the management of capital planning. Through this effort and a renewed focus on returning generating capital projects, we’re comfortable with this range of spending in 2017. On slide 20, I will cover our increased financial flexibility and solid liquidity position. At year end, we had a cash balance of $522 million, net debt of $17.4 billion and covenant leverage of 4.08 times. We have relatively low debt maturities over the next three years, with $363 million due this year; $733 million due 2018, the majority of which is in Q4 of 2018; and $818 million due 2019. Existing liquidity together with ongoing cash flow from operations will enable us to meet these maturities and reduce leverage over time. I also want to note that we executed $240 million in additional bond exchanges in Q4. I currently anticipate our leverage will remain in the 4.2 times range over the next couple of years before seeing a gradual decline thereafter. The amendments to our term loan and revolving credit facility include combining our term loan A and revolver into a single agreement, extending the revolver from 2018 to 2022, upsizing the revolver to $850 million and unifying the covenants for the facilities to include more flexible terms. These amendments, particularly the revised and unified covenant, significantly improve and solidify Frontier's financial picture and provide us with additional flexibility as we transition to normalized operations in the acquired CTF properties over the coming quarters. With the expanded security package, we will have access to additional capital markets which will enable us to reduce our cost of capital and improve free cash flow. Lastly, I want to note that our Board has proposed and will recommend to shareholders at the upcoming meeting in May a reverse stock split. A range between 1-for-10 and 1-for-25 is proposed, with the Board designating the final ratio within 90 days after approval. Turning to our 2017 guidance on slide 21, as I mentioned earlier, we expect capital spending to be between $1 billion and $1.25 billion. A few integration projects do remain and must be completed in order to align the Legacy and CTF businesses. As a result, we anticipate integration OpEx and CapEx amounts of less than $50 million each. Cash taxes will be $0 to $50 million, excluding any impact from legislation that may occur. We remain optimistic that any new tax legislation would not adversely impact domestic infrastructure company. Free-cash-flow guidance is a range of $800 million to $1 billion and I would like to point out the payout ratio would be 61% at the low end of the guidance. I will now pass the call back to the operator, who will open the line for questions.

[Operator Instructions]. We will take our first question from Batya Levi with UBS.

First a question on the revenue trends, you mentioned that you expect that to continue throughout the year. Where do you think revenue decline can get to this year? Also on the commercial side, we had seen stability. But despite the call center disruption that happened earlier in the mid-year, can you talk a little bit more on why we saw that sequential decline on commercial? And one other question on the broadband adds. I just could not follow the improvement that you had been talking about from 3Q to 4Q. It looks like you lost 91,000 adds. If I add the three segments, I get to about 72,000. What's the difference? Thank you

Batya, this is Dan. Let me tackle the commercial stability and then I think Perley will talk to the revenue trends in the broadband addition. On the commercial side, you're right, we have had a fairly stable SME base for a number of quarters. The principal sales channel for some of the smaller accounts is our contact centers. As we've talked on the last call and on a number of other venues, we did have that significant disruption in the Q3 timeframe. So that disrupted not only the sales channel which is the principal way that we address opportunities in that market, but also customer service issues. So we did wind up with a little bit more churn in that we started to see that return to more normal levels right away. The other things that we saw in the CTF side was slightly lower sales during that same period, but also a number of customers were caught up in that treatment process that we described. And that really was a key drivers on the commercial side. On the carrier side, we did see about $3 million on the wireless back haul and we had a one-time settlement with a single carrier for about $2 million.

Can you provide more color on how that has trended throughout the year so far?

On which issue?

On the commercial.

How it's trended for, I'm sorry?

In terms of the rate of decline, do you see some stability so far in the first quarter on?

Yes, we have started to see better stability in the first quarter. There will still be some impact in CTF for some of that clean up, but on the Legacy side, we have started to see some stability.

To frame your first question on revenue trends, as Dan mentioned, there is another incremental $25 million of cleanup that will work its way in Q1 related to these account write-offs on the CTF properties. From that point forward, we do expect to hit a more normal revenue trend, if you will, as we move forward in the quarters for the year. On your broadband question, I will point you back to the presentation on slide 7 and slide 8 and these are our broadband net adds, ex the account cleanup because you need to remove these accounts that we have written off. And as you see there on the CTF side on slide 7, the copper-based, the DSL product did improved from Q3 to Q4, as well as the FiOs did improved from Q3 to Q4. And on slide 8 on Legacy, you will see that broadband did improve from Q3 to Q4. And that's where Dan is highlighting -- we have been highlighting our improved broadband trends as we move from Q3 to Q4 and work our way through this account cleanup and get marketing back in the market place and as we move forward.

Okay and just to follow-up on normal rate of decline on the revenues, how would you characterize that? Would you go back to a low single-digit revenue decline throughout the year?

I'm not going to frame that right now. The way we look at it is we need to get CTF stabilized which as I've said which will take over the coming quarters. We do expect to see Legacy return to a normal trend once we get past Q1 as well. And then we would expect to see revenue stabilize and begin to improve.

We will take our next question from Phil Cusack with JPMorgan.

Hi guys, thanks, two if I can. First, why not reiterate the $4 billion in 2017 EBITDA guide or even mention it on the call? What surprised you since you gave that guidance only a few months ago, if anything? And second, with leverage remaining in the 4.2 times range for the next couple of years, I think you said, Perley, does that mean you expect EBITDA down again in 2018 and why? The plan seems to make sense, but given your history recently of execution, it seems like there's real risk that it doesn't go as well as you hope. Is it still the prudent thing for the business to continue to pay most of your cash flow out in dividends and do you think the investors should be giving you credit for it? Thanks.

Let me take the first two and Dan can discuss dividends and cash flow. On the $4 billion, we basically guided the street to $1 billion EBITDA in Q4 and we fell short of that number. It's clearly driven by this account cleanup on CTF and that will spill over into Q1 as well. We missed our jump-off point for the year and we have accelerated our synergies. So as a goal internally as a Company, we still want to achieve $4 billion, but it will take us longer than what we originally thought due to our jump-off point and where CTF will stabilize. So we will continue to work on taking more cost out of the business, but it's going to be a slower process to get there. On the 4.2 range, so I think I framed that question for you as well, we're at 4.08 now. I think we'll inch up to 4.2 and then as we get to a couple years out, we should then be able to start declining again as we work through these normal maturities and get those paid off. But we've got to get -- it's about getting our top line stabilized first while we continue to take cost out of the business.

And Phil, from the dividend perspective, our Board recently met as recently as two weeks ago. They obviously look at the allocation of capital and resources for us. They reviewed the complete plan that we presented on 2017, as well as the cash flows and all the initiatives that we're undertaking right now and they were comfortable declaring the dividend. So there has been no change in our policy on that perspective and they will just continue to evaluate that going forward.

Okay. Perley, can I follow-up on the account cleanup? You gave the $1 billion in 4Q guidance in November. Was the account cleanup harder than you expected? Were there more non-pays than you thought? I would've thought would be a fairly clear thing you could see happening within the business that people weren't paying you?

Well, we certainly saw the business of people were not paying, but we also, don't forget, didn't treat any of these customers for over five months. So this is -- what we said on the Q3 call and since then, we're not sure how many of them were going to be slow-pay or no-pay customers and we had far more no-pay customers than what we had originally thought there might be. So it was not as we had expected and as talked about, there's still cleanup happening in Q1 that we're now through at the end of February but still impact Q1's results.

We will take our next question from Greg Williams with Cowen and Company.

I just had one question on the video product. You had some commentary about still investing in it, but at the same time, perhaps taking a pause and slowing down the video deployment as you weigh your options. I know that another peer of yours a few weeks ago had similar comments. Does that imply that you're building an OTT strategy or partnering with OTT providers? And an offshoot question to that is, how do we think about lowering of your CapEx? Is that also implied with a pause in video deployment or are you still spending there? Thanks.

Greg, this is Dan. First off, we did roll out to a number of markets last year. We had anticipated going full throttle on those markets, but they were caught up in the whole disruption of what happened following the integration. So we did market through them. We have seen sales in a number of the markets. We actually turned up two at the very end of the year. What we decided at this point to really do is focus on those five markets, evaluate them, ensure that where we’re and what we thought would be profitability and good growth rates are there. That's similar to what we said when we were introducing the strategy. You're absolutely right, there has been some advances and some changes in the landscape on the OTT side. So I think we could spend time developing our own; we may partner with others, but I think that will be an important part of the strategy going forward. But that's not going to stop us from investing in the network. One of the key priorities is revenue generation, whether that's really on the commercial side or it's really making sure that our speeds and our network are congestion-free going forward, because more and more video traffic is flowing and we want, whether it's our OTT product or it's someone else's, we want to make sure that's a good experience for customers. So we're not really cutting CapEx at this point.

We will take our next question from David Barden with Bank of America Merrill Lynch.

It's Josh Frantz in for Dave, thanks for taking the questions. Two if I could. On the synergies, where are the extra cost coming from and can you be comfortable that the efforts to grow the revenue won't be impacted? And then secondly, what is the plan to refi the mandatory preferred? Is there anything coming shortly? Thanks.

Josh, this is Dan, I will take the synergy question. One of the things, when you look at our plan, we said all along there's a number of system initiatives that we have built as part of the integration that we could leverage and take further costs out of our business. So that's always been in the plan. One of the areas that allowed us to get more confident on taking further synergies and accelerating them is that there were a number of areas in the business where because we didn't have the time necessary to replicate functionality by Verizon completely, we staffed up or have used contractors in some cases and that actually created a dissynergy. So as we go through this year, we actually see a huge benefit to completing some of those projects. We're going to, as Perley said, they'll be about $50 million of CapEx that will be spent as we do that. And that will allow us to go after some of the dissynergies that were created when we did the flash-cut conversion. We feel very confident about that. We actually think it doesn't hurt our revenue trajectory; it actually enhances it, because some of the tools and systems were very helpful in both retaining and acquiring customers.

Josh, on the preferred, there is no refinancing of them. They convert into common stock in 2018 in the July timeframe, so they will just directly convert into common stock at that time.

We will take our next question from Scott Goldman with Jefferies.

Wondering if you could maybe expand a little bit on some of the aggressive customer acquisition offers that you have been or plan to be putting into place? Wondering what weight offer you're going with. Is this something where you're going to be really using pricing as a tool or trying to maybe leverage network investment and highlight that to help drive improvement on the customer retention side? And then I think in the prepared remarks, you guys mentioned maybe an increase in voluntary churn in 1Q due to enhanced credit and collection. Any way to size what that impact could be for us?

Sure Scott, first on the offer, we launched an offer in all of the CTF markets and some of our other markets, including the Pacific Northwest, Indiana and Connecticut, where we were really promoting triple play at a $60 price point. Obviously, that's an entry-level offer, but a video double play at $55, a voice double play at $50 and a Simply Broadband offer at $40. It's combined with Amazon gift card special intervals for installation and it really is a very competitive, we think, an offer that's going to really sing in the marketplace. That just launched in the last two to three weeks. We're starting to see it soak, different channels are responding at different rates. So we will be able to give you a better feel for that and how well it's performing as we get a little bit further into the quarter. I think in the rest of our markets, we're going with some of the traditional offers that we have had with the very simple pricing. We have used Amazon gift cards as a way of enticing folks and going after win-backs.

And on the voluntary churn?

I'm sorry. On the voluntary churn, Scott, we just implemented that; it will be happening across the full quarter. It will potentially pull in and accelerate the process. And as we do that, it will probably impact us with a slightly higher involuntary churn. Could be anywhere from 10,000 plus unit.

Okay. And then just one follow-up, as you think about the challenges you've gone through over the last couple of quarters and obviously, I think there's mechanisms in place to try and address a lot of that. Has your long term view of what you think the CTF properties can deliver, whether it's via revenue, via EBITDA, via the broadband opportunity, has any of that changed in light of some of the challenges and maybe win backs and that type of data that you're collecting?

No. From our perspective, it was as I said before, it was about really us getting our operational house in order. I think we've done a very good job of doing that over the last three or four months. As we went through that process, we have been timing when we really wanted to push really hard, because he wanted to have the whole system work in a very smooth way, so that we could deliver on our promises. I think what we've seen on the copper side is where we upgrade, the areas we’re seeing, the opportunities and customers are responding because of the choice for them. I think that as we do some cap upgrades and California specifically, that will be some unique opportunities. And I think that we feel very good about the ability to win back customers. We have customers that come back today that say they weren't very happy when they went over to Time Warner now, Charter. So I think we don't feel that the opportunity has degraded. I think we’re further down the curve than we hope to be at this point and I would just say, we actually think the opportunity is bigger than what I had originally thought on the commercial side. I have always talked about that as an opportunity based on the lack of focus that Verizon had on these markets, but I'm more convinced of that each and every day. And it was about putting the right offer strategy tactics and really distribution teams in place to really go after them. I think that we've done a good job on that and it's going to take the rest of the year as we build the momentum and start to see the real benefits of that [indiscernible].

We will take our next question from Frank Louthan with Raymond James.

I have got two questions. The first one I'm going to ask a simple question and I hope to get an answer. And knowing that we should probably be able to do the math, but unfortunately, sometimes in the past, those of us on this end of the call are consistently off with the numbers we come up with. So just wanted to make sure we're clear here. I'm looking at the slide 6 in the third bullet. Can you quantify the dollar amount? You say it's going to improve by 50%. What exactly are you defining as the dollar amount of the revenue decline in Q4? And then, what are you quantifying as what it should improve to and adjusted for the account cleanup? Can you just give us those dollar figures?

Frank, it's Perley. The way to think about it is our revenue declined $115 million in Q4 over Q3 and we framed $45 million of that as related to the CTF customer cleanup. And we’re expecting another, so if you net the two of those, you get a $70 million decline quarter over quarter. We framed another $25 million of decline happening in Q1. We expect the non-customer cleanup to be about a 50% improvement is how we're thinking about things right now as we look at January's results. We obviously haven't closed February yet, but we're thinking about a 50% improvement over that, to frame it for you.

So $60 million in total with the additional cleanup?

That's what we were thinking, where we said today, after one month of actual and getting ready to close the second month.

And then on your organization structure, according to the business lines, what is it that's different about this one versus your last couple of org structure changes you have done? And why is this now the right focus and what should we see out of that over the next 12 months?

Frank, the previous structures that we had were really more regionally focused and those, although they allowed us to be close to the customer in many ways, it created a lack of standardization. As we scale to the current size of the organization, it became painfully apparent that without that lack of standardization and without the lack of -- complete lack of focus or I should say complete focus on a certain segment, there was competing priorities, whether it was around mind-share or whether it was around capital allocation, whether it was around technician allocation. And each one of our regional presidents, although effective in running the business, really wasn't maybe optimized in how they would think through how to allocate capital and how to allocate resources to drive the most revenue during the periods. So when we looked at the new structure, we looked at how could we optimize so that the marketing, the consumer tactics, everything from how we invest for congestion and cord augmentation could be married more closely with the marketing teams and the call center performance. That really has worked really well. We've seen the benefits of that immediately. We have been able to make decisions quicker, faster and be able to go to market in a way that really takes advantage of the opportunities that get bubbled up, either through the contact centers or through channel partners and we make adjustments accordingly. On the commercial side, having a team that does nothing but eat and really look at the commercial market 24 hours a day, seven days a week and then is focused on how to allocate capital and go after those opportunities has really been something that has allowed us to exceed what our ramp rate expectations have been for the CTF properties. And as we saw that, we actually went back and decided that this was absolutely the right model that we would move back into our Legacy properties and now it's under a centralized person. Probably one of our most aggressive operators is running that right now. He really -- you might have seen him written up in a Pierce Telecom article a week or so ago. And he looks at the market and he sees where Verizon really hasn't participated and he sees the opportunity to be hyper-aggressive in going after them. And he's really allocated resources in a fundamentally different way than what we had been doing before. So I actually think the time is the perfect time in our history and it's the perfect time to go after unique opportunity with that many lit buildings on net, ready to go after with the right resources. I think it's an opportunity that is too good to pass by and the reorganization allows us to go after it in a big way.

Okay, it makes sense on the CTF side. On the residential side, how does that fit with your past approach to being a lot more local, especially in the rural markets and knowing what the customers want in those markets and so forth? How was that -- how are you supporting that strategy or have you changed that to seeing some better ways to go about it? Because that seemed to be an advantage in those smaller markets and a lot of your territory that you talked about in the past? Have you changed that position or how is this the same?

I wouldn't say that we've changed that position completely, Frank. I think what it did create was a fair amount of inefficiency as we were doing creative development and offer management. We have maintained some of those field marketing leads in the areas to get that local intelligence that gets filtered back up. But when you are trying -- where we were was a seven-region structure before we did this reorganization. When you're trying to actually adjust or modify offers seven different ways to potentially go in seven different directions based on what a regional president might be dictating, it was very, very difficult and costly to do minor changes on the creative. And when we looked at it, mostly the offers were getting homogenized and people wound up going to market in a similar way. Because parts of Indiana are essentially the same, other than where we have FiOs; parts of New York are essentially the same. Some of the benefits that we saw four or five years ago from hyper local were falling away, quite frankly. So this made a lot of sense to us and it seems like a much more efficient way to manage our marketing expense.

We will take our next question from Matthew Niknam with Deutsche Bank.

Okay, guys, thank you for taking the question. Just two if I could. One on the efforts to improve retention and stabilize the top line. Just wondering conceptually if you can talk us through the rationale there between seeking to stabilize the top line and improving retention along with really aggressively cutting out expenses and even pulling forward some of those initiatives. And then, secondly, just a follow-up on the last question on commercial. What is your current share in both the CTF and Legacy markets? And where do you think it can go, whether it's a percentage basis or absolute dollars, with some of the initiatives you're talking about in commercial? Thanks

So Matt, when I look at retention, one of the key things that I think is important to us and that's part of the systems that we're investing in and the first parts of it will be up and functioning really over the next 60 to 90 days and that really is systems that marry all of the information around a customer to a representative who is actually trying to retain and potentially upsell or move the customer to a different packet. That's one of the features that Verizon had that we didn't have. It created a number of issues for us right out of the gate. We're investing heavily in that, in a system that allows us to manage that more effectively. It doesn't necessarily mean that I'm going to have to spend more money to retain those customers. It may mean that it's a different offer. It may mean a slightly different offer from what they have at that point in time. It could be a speed upgrade, it could be video tier upgrade, could be any number of things, but don't think of it as we're cutting expenses now hurt retention; I think it's just the opposite. We're just trying to get smarter at how we do going forward. And then as far as the commercial market share, I think it's safe to say that in those areas we could have as low as the low 20s as a market share perspective. So we see the opportunity as fairly large, especially on the small segment where we really haven't had historically a good approach of going after that customer base. That's an area that most companies and seeded to the cable entrants. We actually think with the right product set and the right way of going to market and distribution tactic on that, that that's a nice opportunity for us to go after.

Operator, let's take the last question please.

Our last question will go to Simon Flannery with Morgan Stanley.

It's Spencer for Simon. Thanks for taking the question. You guys called out that you saw a significant improvement in December in both video and broadband and the Legacy market. So I was just wondering, is that partly driven on the video side at least by Vantage and just your latest outlook for over-the-top products? Thanks

Spencer, so on the over-the-top products, we're looking at the technology to integrate our own video product with others and actually embedding some of the others. As you know or have seen probably, whether it's Netflix or some others in our own video guide. So we're always going to be looking at over-the-top as a good solution for a significant part of our network. How we do it, whether we do it on our own which we frankly have the capabilities to do, it's just a matter of whether or not the product set with our current content rights is the right product set to bring to market to be competitive or with a partnership with others. I think those are the questions that we're working on right now. But we're a big believer in over-the-top, but we have a significant linear footprint and a linear store of customers that we're managing and trying to grow as well. But I think you'll see it as a dual strategy for us moving forward and that will be something that we'll be working on concurrently over the next 6 to 12 months.

Spencer, on your first question on the improvement in Q4, it's really a couple of things. As we mentioned, Q3 had considerable disruption in our Legacy business which we saw across our operating metrics and then into our sales metrics and customer metrics. And just getting it into a better cadence in Q4 helped, as well as marketing dropping in the second half of November and the pull through that gave. So it's a number of things, just getting the Legacy business back to a stable place in Q4 which is what helped there.

You are welcome. In closing, we continue to work hard to reach our potential in terms of performance, products and customer service. Our team has accomplished much during the process, but there is much work to be done. With our new consumer and commercial business units in place and the account cleanup process being finalized in Q1, we’re positioning Frontier for improved performance over the course of 2017 and beyond. On our last call, I gave you my personal commitment that we would drive higher level of performance for our newly expanded business. And today I want to reaffirm that commitment. Our whole team is focused on the highest level of execution to the benefit of all of our stakeholders, including customers, shareholders and employees. Thank you for participating in our call. We look forward to updating you next quarter.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation.