© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, everyone, and welcome to the Frontier Communications Fourth Quarter 2017 Earnings Conference Call. This call is being recorded. At this time, I'd like to turn the call over to Mr. Luke Szymczak. Please go ahead, sir.
Thank you, Shannon, and good afternoon, and 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, everyone, and thank you for joining us. I'm pleased to report that we are continuing to execute upon our key initiatives to improve customer retention, enhance the customer experience, maintain momentum in attracting new customers and align our cost structure. In the fourth quarter, we extended our multi-quarter trend of achieving improving CTF FiOS net additions and churn. FiOS data net additions were broadly stable and, in 2 CTF markets, we have already achieved positive net additions. We are near stability on the CTF FiOS base of customers and expect positive growth of FiOS data subscribers in 2018. In addition, we delivered $919 million of adjusted EBITDA in the quarter, in the middle of our guidance range and the third straight quarter of stable EBITDA performance. While we made strong progress in improving the operations and performance of Frontier, our objectives to delever the business have not been met. Our board regularly evaluates the optimal capital allocation of the business and has unanimously voted to suspend the common stock dividend to focus on accelerating debt reduction. This action will make available $250 million of additional cash annually following the conversion of the mandatory convertible preferred stock in June of this year. We will use this cash to reduce debt at a faster rate, supporting our ability to address the larger debt towers in coming years and giving us ample runway to execute our strategy. In further steps to address and improve our capital structure, in the fourth quarter, we purchased $110 million of near-term maturities on the open market and, in January, we amended our credit agreements in order to provide additional financial flexibility. As we execute on our strategy to deliver on the full potential of our strong assets and generate substantial cash flow in the process, we are well-positioned to address our upcoming note maturities. Turning back to our operations. Our initiatives in Legacy Consumer have begun to deliver some improving trends as well. For instance, in Q4, Legacy Consumer revenue declined sequentially only $5 million compared to an approximate $10 million rate of sequential decline in prior quarters. We also improved Legacy Customer churn by 9 basis points sequentially to 1.83% while increasing ARPC sequentially. Nonetheless, we still have more to do to reinvigorate our Legacy business as Legacy Broadband net additions in Q4 were sequentially weaker driven by a decline in gross additions. I'm not satisfied with this outcome and we are deep into implementing a range of initiatives that we expect to improve subscriber trends in Legacy over the coming quarters. Shifting to our Commercial business. We are continuing to make progress in most of the areas of focus. The SME portion was nearly stable sequentially. And within SME, the enterprise, medium and higher end of small as a group was roughly stable overall and we improved the sequential decline in the small office home office portion. The majority of decline in Commercial came in wholesale, which reflects continued pressure in wireless backhaul and technology transitions to higher capacity transport. As we continue to improve our sales execution in all channels, we anticipate stronger performance from Commercial in coming quarters. Now I'll discuss some of our key results during the fourth quarter in more detail, starting with our Consumer business. We continue to make progress in the Consumer business and we believe stabilization is on the horizon. Churn and net addition improvements within our CTF FiOS markets have been the main driver of improvement and are a direct result of our extensive efforts to refine and enhance customer retention. During the quarter, we augmented our pricing to reflect the value we are delivering to our customers and to offset the escalating cost trend in content pricing. This initiative was positive for ARPC and we were also able to improve sequential -- churn sequentially simultaneously. In our Legacy operations, we were able to improve consumer churn slightly in Q4 as a result of our implementation of pick-a-platform features as well as other retention initiatives. As part of our initiative to improve Broadband gross additions in Legacy, we are planning to introduce new offers and capabilities by the end of Q1 and anticipate the benefits starting in Q2 and increasing in the second half of 2018. Our goal is to improve product penetration with renewed focus on Legacy markets, especially our low-density markets associated with the CAF II program. Although it's early in the process, the Consumer team, led by John Maduri, is bringing a more balanced approach to pursue profitable growth by identifying opportunities to leverage all assets across the entire network. For example, in Q3, we launched a new FiOS acquisition offer with speeds starting at 100 megabits. We plan to capture more value across our entire footprint by utilizing the technology previously deployed in both acquisition and retention scenarios. In addition, we are finding that an enhanced marketing campaign with a more competitive offer strategy is having a favorable impact on both Broadband sales and improved Video attachment rates. Longer term, we expect that further improvements in several sales channels will have a favorable impact on gross add trends. Earlier, I mentioned that PEGA is already contributing to improvements in churn. The PEGA platform is improving the entire customer experience. In Q4, we implemented enhancements to our technical support processes to improve troubleshooting effectiveness and, ultimately, the customer experience. The implementation of the new acquisition offered using our new systems improved our call center and channel execution, resulting in better alignment with customer expectations and simplicity in bill presentment. As we head into 2018, we will continue to enhance our customer interaction processes in care and technical support and expose those enhancements to all customer interface channels. We expect this will allow us to further improve our cost structure and provide a better customer experience for our existing customers. We implemented a range of initiatives on the PEGA platform that, together, have improved the customer experience, improved customer care, increased retention and continued to drive higher customer acquisition, all while reducing marketing expense. These tools are standardizing the capabilities of our customer service representatives, resulting in more consistent experiences and outcomes. As you know, there have been a number of extreme weather events around the country, storms in Texas and Florida and, most recently, fires and mudslides in California. These storms had a severe impact on some of our customers. In Texas and Florida, our systems performed very well, which has enabled a more rapid recovery and helped our customers get back to normal extremely fast. We expect a similar pattern to emerge from California. Again, I want to thank our tireless employees for the speed at which they were able to restore service to these affected areas. Turning to our Commercial business. We continue to see progress in implementing our initiatives evidenced by the improvement in our rate of revenue decline. The tools that we have deployed enabling real-time quoting for Ethernet, paired with operational initiatives to reduce installation intervals, are contributing to results and we have seen sequential growth in circuit installations. A key area of focus in SME has been selling robust customer solutions and bundling our data networking expertise with advanced networking solutions from business partners. We are making progress with this and we are in the process of expanding our direct sales staff by 20% in high-potential territories across our network footprint, which we will accomplish by rebalancing resources. We are also working to improve alternate channel sales by building strategic partnerships and implementing tools that make doing business with Frontier easier. Also, as we continue to roll out solutions that drive revenue while enabling our customers to more fully realize the benefits of Frontier's data network such as our new Total360 offering. Total360, powered by Datto, is an innovative way of storing data and allows for instant on-site or off-site recovery and helping organizations to minimize downtime in the event of a digital or physical disruption or disaster. As we look in the carrier/wholesale business, we continue to work to make it easier to do business with Frontier, rolling out our qualification tool to reduce time to quote and reducing installation intervals. We also are focusing on leveraging fiber-connected buildings and cell towers to develop creative solutions for our carrier customers. Nonetheless, we expect to experience continued pressure from wireless backhaul migration from select carriers and transition to higher capacity services from older TDM technologies. These pressures are consistent with our experience in previous years and we have launched a series of carrier-specific initiatives to capitalize on unique opportunities to help offset these pressures. In addition to the operational progress we have made across our Consumer and Commercial businesses, the company is continuing to benefit from further efficiency and cost reduction initiatives. Improvements are being driven by a range of programs, including our implementation of the PEGA platform, reducing third party maintenance costs by leveraging partnerships and efficiencies achieved with a centralized reporting structure. Frontier achieved an increase in adjusted EBITDA margins in Q4 and we are on track to obtain the remaining cost synergies by mid-2018. In summary, we are pleased with ongoing progress during the fourth quarter as we executed well on a number of key initiatives. Looking forward, I am confident in our ability to further stabilize the business and improve both the top and bottom line. I'll now turn the call over to our CFO, Perley McBride, to discuss our financial performance.
Thank you, Dan, and good afternoon, everyone. I will start with an overview of our fourth quarter financial performance and then provide our outlook for 2018. We will then open up the call for questions. Total Q4 revenue was $2.22 billion, a 1.5% decline compared to the third quarter of 2017. The improving trend in Q4 revenue was driven by sequential improvement in Legacy revenues and stability in CTF revenue trends. As you can see on Slide 5, we continue to execute on our cost reduction initiatives highlighted by the $39 million reduction in adjusted operating expense in Q4. I am pleased to say we have attained over $190 million in annualized cost synergies and remain on track to achieve our $350 million in annualized run rate cost synergies by the end of Q2 of 2018. Our improving revenue trend and constant cost focus on cost reduction resulted in adjusted EBITDA of $919 million. This was roughly at the midpoint of our guidance range. I am pleased that Q4 represents our third consecutive quarter of stability in adjusted EBITDA. Adjusted EBITDA margin was 41.5% and we continue to target the adjusted EBITDA margins above 40%. Our fourth quarter results include a $1.82 billion after-tax goodwill impairment and an $830 million tax benefit resulting from the reduction in federal tax rates. Absent these 2 items, our net income was broadly breakeven. Regarding the goodwill impairment, Frontier recorded an impairment charge of $1.82 billion net of tax in the fourth quarter. This impairment consisted of 2 components. One component is related to a lower enterprise valuation of the company that resulted from a downward revision of the assumed EBITDA multiple. This was responsible for approximately 55% of the impairment. The second component relates to tax reform. The tax reform and its associated reduction in the corporate tax rate resulted in an increase to retained earnings of $830 million due to the revaluation of our net deferred tax assets and deferred tax liabilities. Since we already had an impairment, this increase in retained earnings resulted in a dollar-for-dollar addition to the net goodwill impairment. I will spend a moment now talking about the impact on Frontier from the recent federal tax reform. There are 3 key areas of the reform -- from the reform that impacted Frontier: First is the reduction in the corporate tax rate to 21% from 35%; second is the ability to fully depreciate capital expenditures as incurred during the next 5 years; and third is the limitations on interest expense deductibility. From an income statement perspective, the change in the corporate tax rate required us to revalue our deferred tax assets and our deferred tax liabilities, resulting in an $830 million net benefit to net income in the fourth quarter. From a cash perspective, although the cumulative effect of the tax reform change will accelerate the usage of our federal NOL carryforwards, which totaled $2.2 billion at December 31, 2017, we continue to expect that we will have no material federal cash tax obligations for the next few years. To conclude on Slide 5, adjusted free cash flow was $228 million for the fourth quarter, up from $182 million in Q3 of 2017. Please turn to Slide 6. We made progress throughout the year by improving the declines in Data & Internet services revenue, with the goal of turning this trend positive in order to offset Voice declines. In Q4, our Broadband service revenue continued to improve while the decline in Data & Internet services was driven by wholesale revenue as Dan previously mentioned. Voice and Video revenue trends also continued to improved in Q4 and other revenue increased primarily due to seasonally higher nonrecurring business solutions sales. Total Consumer revenue was $1.09 billion in Q4 2017, down $16 million or 1.5% from Q3 2017. Of the $16 million decline, $5 million was related to Legacy and $11 million related to CTF. Revenue for our Commercial business was $941 million, down $17 million or 1.9% from Q3 2017. As mentioned, the majority of the decline came from our wholesale business. In Small, Medium, & Enterprise or SME, we saw improved trends with enterprise, medium and the high end of small as a group remaining broadly stable sequentially. As Dan mentioned, we expect to see improvements on our Commercial business during 2018. Please turn to Slide 7. We are pleased with the improving trends in CTF. CTF FiOS broadband gross adds continued to increase and are at the highest level since we acquired the business. The combination of solid CTF FiOS gross adds and improved churn resulted in a significant improvement in the trend for CTF FiOS net adds and we are very pleased with our position as we entered 2018. Please turn to Slide 8. Turning to Legacy Frontier, we improved consumer customer churn in Q4 and are planning to introduce new offers and capabilities with the goal of improving broadband gross adds -- gross additions. Additionally, there is a renewed and consistent focus in our key Legacy markets to deepen our penetration and drive growth in our low-density markets associated with CAF, the Connect America Fund. As we move to the next series of slides, we are introducing 3 new views this quarter, which you will see on Slides 9, 10 and 11. Since we manage the sales and marketing of Frontier services at Consumer and Commercial and not CTF and Legacy, we are introducing these new views. We will, however, continue to provide the CTF Legacy split for the next few quarters. Please turn to Slide 9. On this slide, we show Consumer Broadband and Video services for the entirety of Frontier. As the integration of CTF is complete, we are presenting a consolidated view of Consumer. The trends in fiber broadband for Consumer are very strong. Gross adds continue to trend up and, coupled with improving churn, the result has generated continued improvement in net additions. Video trends have also continued to improve and, as mentioned, we have new plans for copper broadband in 2018. Please turn to Slide 10. On this slide, we show Commercial Broadband services, which is a small part of the overall Commercial business, but Retail Broadband is an important piece of the small business segment. The Commercial Broadband service consists of Retail Broadband and Wholesale Broadband. Retail Broadband has maintained a consistent trend in net losses during the year, but as Dan mentioned, we expect improved trends in the small office home office segment in 2018. The Wholesale Broadband product does experience fluctuations in sales cycles, which was seen in Q4. Please turn to Slide 11. On this slide, we show the trends in our Consumer customers. Our Consumer customer trends continued on a positive trajectory in Q4. Customer gross adds are relatively stable and churn continued to improve, which is a result of new initiatives and overall improvement in the customer experience. Please turn to Slide 12. Consumer ARPC and our Legacy business was $65.11, an increase of $1.12 when compared with Q3. ARPC within our CTF markets saw an increase of $0.02, but note that the third quarter comparable period benefited from a $0.68 uplift associated with the Mayweather-McGregor fight. Our combined ARPC of $81.61 increased $0.99 after adjusting for the $0.29 uplift associated with the Mayweather-McGregor fight. In all, we are pleased with ARPC and the continued improvement in customer and product trends. Please turn to Slide 13. Our CapEx for 2017 was $1.15 billion with more than 75% of our capital program focused on revenue-generating and productivity-enhancing projects. The Connect America Fund or CAF II program requires companies that accept this fund to deploy broadband to 40% of eligible locations by the end of 2017 and 60% of eligible locations by the end of 2018. We are pleased to report that as of December 31, Frontier had reached the 40% milestone in all 29 states. Furthermore, Frontier is on track to meet our 2018 goals with 3 states already exceeding the 60% threshold as of January 2018. Frontier now offers broadband capability to 351,000 locations in its CAF II-eligible areas, with our goal to pass 734,000 locations by the end of 2020. Please turn to Slide 14. In Q4, we purchased $110 million principal amount of our senior unsecured notes on the open market. This included $86.6 million of our 2018 8 1/8 notes and $23.5 million of our 2019 7 1/8 notes. Our near-term maturity profile continues to be manageable with $491 million of bonds due in Q4 2018 and $404 million due in 2019. As Dan mentioned, we have revised our capital allocation to accelerate debt reduction and the suspension of the dividend gives Frontier an incremental $250 million of additional cash to direct towards debt reduction annually following the conversion of the mandatory convertible preferred stock in June of this year. We also continue to have an undrawn $850 million revolver. We remain committed to deleveraging and improving the financial profile of the business. In January, we had amended our credit agreements, which importantly replaced the net leverage ratio maintenance test with a first lien net leverage ratio maintenance test. The new maintenance test provides for a maximum first lien net leverage ratio of 1.5 to 1.0 stepping down to 1.35 to 1.0 in the quarter ending June 30, 2020, and thereafter. The amendments also modified the covenants to permit junior liens on any debt permitted to be incurred under the credit agreements while limiting the incurrence of first lien debt. We believe these amendments provide operating flexibility, better position us to address note maturities, optimize our access to the debt markets and are an important part of our plan to manage our capital structure. Please turn to Slide 15. For 2018, we are introducing a more traditional and simplified measurement for free cash flow, which is operating free cash flow. We define operating free cash flow as net cash provided from operating activities as per our GAAP financial statements less capital expenditures also as per our GAAP financial statements. This measurement represents the cash generation of the business before taking into account dividends and redemptions of debt and is a more appropriate free cash flow metric for Frontier now that the integration of the CTF properties, with its associated integration and acquisition costs, is complete and the mandatory convertible preferred converts in June of this year. For 2017, operating free cash flow was $662 million. See our earnings release for additional information and limitation of this non-GAAP measure. Please turn to Slide 16 and our guidance. For 2018, we are providing guidance in alignment with 2017 results, that is before any changes related to the new revenue recognition standard. The new revenue recognition standard will impact service revenue categorization as well as selling, general and administrative expenses. We do not, however, anticipate its impact will be material to operating income. We will provide results under both the new and old standards throughout 2018. Our 2018 guidance is as follows: Adjusted EBITDA approximately $3.6 billion; capital expenditures, $1.0 billion to $1.15 billion; cash taxes, less than $25 million; cash pension and OPEB, approximately $150 million; interest expense, approximately $1.5 billion; and operating free cash flow, approximately $800 million. To conclude, as Dan mentioned, company-wide initiatives are translating into improving trends in our financial results and we remain confident in our ability to improve the business every quarter. Thank you for taking the time to join us on the call today. And with that, we will open the lines to take your questions. Operator?
[Operator Instructions] We'll first go to Batya Levi with UBS.
A couple of questions. First, on the operational side, how should we think about the cadence of EBITDA this year? You typically have seasonal expenses in the quarter, but synergies are also ramping. Can we expect sequential growth on EBITDA in the first quarter? And maybe on the Legacy side, you mentioned continued pressure on the gross adds, but some measures are put in place. Have you seen any impacts of those year-to-date? Should we expect the rate of decline improving there? And maybe one more strategically. With more focus on lowering leverage, are you also looking at potential asset sales and if you would consider to maybe look at -- looking at some of the CTF properties as an option to sell?
Batya, I'll take the Legacy gross add part first. We're continuing to refine and reconstruct a lot of the historic bundled construction that exist in all the different acquisitions that we've done over the years. That's going to continue right through Q1 and we're implementing the new bundled construction with PEGA and Sigma platforms we described in the last call. On the retention side, we have started to see some benefits on that already. So I do think that as we get into Q1, we'll see some improvement to the Legacy metrics, but the real benefits will start to add up once we hit the gross adds moving substantially in a different direction. That will only take through the end of Q1 into Q2.
On EBITDA, Batya, we are -- I think we're at a place now where we will see some seasonality in our EBITDA certainly. The way our revenue selling cycles work, the way some of our cost cycles will work, there will be some seasonality on both the revenue side and on the expense side. Q1 is a expense reset for a number of things. So there will be some seasonality in our EBITDA through the course of the year.
And then, your final question, I think that's part -- related to a story that was circulating a few weeks ago. And first of all, I'd say we don't comment on these -- on any specific rumors or speculation or stories that are on the market, Batya. I hope you appreciate that so -- but I would say that we're very pleased with the assets we acquired in the last transaction, the CTF assets. And their performance continues to improve each and every month and we're very pleased with where we've taken that to this point. And -- but as we've always said in the past, we would always do what's right for shareholders and trying to improve value creation and recognize the substantial value of our assets and reduce our leverage over time.
The next question comes from Frank Louthan with Raymond James.
Just want to talk about some of the process maybe you have in place that have helped in the CTF market with the subs. And have you moved those same systems and processes into the Legacy markets? And when can we see those results? And then, when I walk through some of the decision process in taking the dividend to 0, we saw that with one of your peers last summer and some of the -- and the aftermath, a lot of investors would suggest that maybe not going to 0 would have been a better choice, not necessarily forcing a lot of change from various funds. Arguably, this was probably more expected, but just talk us through your thought process on taking it to 0 versus maybe a 95% cut.
Sure, Frank. So first up on the process side, we did -- what we saw as the foundation for really improving the retention and churn side on CTF was when we moved to using the new platforms as the basis for developing the final construction that we used for both acquisition and retention offers. That was kind of a game-changer for us and it really improves simplicity in bill presented and align customer expectations with exactly what we were delivering. So we do think that's going to be a significant improvement as we get into Legacy. Legacy, with its myriad of older packages, is very challenging to get it completely constructed and into the system, but we're working pretty diligently on that and we'll start to see benefits of that as we get really towards the end of Q1 and into Q2. On the dividend question, I think, certainly, last year, the board made the adjustment to the dividend based on an anticipation of our EBITDA being slightly higher from a run rate perspective than where we are right this second. As they looked at where we are today and they looked at the fact that many of our institutional shareholders probably have changed, they made the decision that a better use of that cash would be to move forward with debt reduction while really maintaining what we think is a good investment in our network. They felt that reducing our debt was the best use of that cash flow and the value would pull shareholders as we pay down the debt over time. So that was really the process that they went through.
Next question comes from Philip Cusick with JPMorgan.
Good to see the CTF market, broadband metrics improving. We've seen a lot of promotions in those markets. How should we think about the ARPU in those markets over time given the promotions? And then can you give us a little bit of a preview of what's going on in the legacy markets. You talked about sort of a new pricing structure coming. What do you expect to do there?
Sure, Phil. So I think we've now had the structure around the bundles in CTF for a little over 4 or 5 months, and we really haven't seen any degradation on the ARPU. Those are generally price points that are used to really make the phone ring. And then customers make their own decisions on what features, functions, speeds are really going to drive us going forward for themselves. And I think the real challenge for us as we just go forward is making sure we give customers exactly what they want, good value and then also manage the customer experience as they move from former acquisition pricing to current market pricing. And I think if we do a good job on that I don't think that you'll see us really see any pressures on ARPU or ARPC in those markets as we go forward with the strategy that we have right now.
Phil, the only other thing is -- not to forget is just the -- that, that ARPC is higher obviously because of the video component. And if video trends were to change, that's something that can influence that. But as we've talked about, that has a much smaller impact on EBITDA.
Phil, just to answer your question on the legacy side, we absolutely are seeing some improvements as we're getting some of that functionality deployed in the various markets, and we're developing both pricing and marketing tactics that differentiate how we go to market in different area, whether that's in less urban areas and more rural areas, places where competitive density might be slightly less than in other areas. So we're really being a little bit more balanced in the approach of going to market, and we're starting to see the benefit on that already.
Great. And then if I can, CapEx coming down lower in '18, does it make sense to take some of that dividend cut and reinvest in the network faster?
Well, I think we are becoming better and better at our capital program as a company. You'll see our capital range is -- goes from what we spent this year which I would, as I talked about in 2017, I'm not convinced we were as efficient or effective in Q1 of '17 with our capital program as we were in Q2, Q3 and Q4. So I think we continue to become more efficient with our capital program. The way we are focused on trying to drive as much of our capital to either revenue-generating or cost improving, that will continue. We continue to make sure all of it -- we're not turning away investments on the revenue side, and we prioritize our cost initiatives constantly. So I think we're very comfortable with our capital investment currently. CAF is a big investment for us. Obviously, new subdivisions with fiber-to-the-home are big investments for us. Our transformational initiatives on the cost side are big investments for us. And we continue to respond to all of our sales needs, both on the consumer side and on the commercial side.
The next question comes from David Barden with Bank of America.
This is Angela on for David. Two questions if I could. Last quarter you mentioned you expect to reach commercial business stabilization. You've seen solid trends from mostly the carriers. And this quarter you sort of broke out the customer net adds from the commercial side. And it seems like wholesale broadband is kind of where you've -- where net adds flip from adds to losses this quarter. So can you explain the initiatives you've launched with carriers and what kind of trends you are seeing so far in 1Q? And yes just...
Yes. This is Perley -- let me clarify that. So our commercial business has -- is basically divided up about 1/3, 1/3, 1/3 across -- 1/3 is carrier, carrier wholesale, about 1/3 is medium/large government and 1/3 third is small and really small. The slide that we have in the deck is commercial broadband. Commercial broadband is a product that sits in that -- well, on that slide you see retail wholesale, that is a product in the small space, if you will, and -- the retail is in a small space. The wholesale are different types of resellers and things like that. But that's different than our carrier or wholesale business which is 1/3 of our commercial business. So when we talked about commercial stabilizing, we're definitely seeing the stabilization in the medium/large government and in the small, really small. It's the carrier wholesale component -- this isn't the broadband product, it's the carrier wholesale component which is fixed wireless backhaul, which is the transition from TDM to IP-based circuit, that's the piece that's stepped down in Q4 and so that's the piece that Dan referenced on our carrier business, that's why commercial stepped down in Q4. It's not the broadband product. And to frame that, the commercial broadband product is less than 10% of the total commercial revenues. But it's a key part of the small and really small commercial business. I don't want you to confuse the wholesale from the carrier business that we have.
Got it. Now what kind of trends are you seeing from the carrier front given the initiatives that you've taken so far this quarter?
That went -- on the carrier side, we haven't really seen -- and that is really very dependent upon partners that might make decisions around their business strategy of either being in a market, not being in a market. So it can move around quite a bit. I wouldn't say that there's any specific initiatives that are driving that for an improvement. We could see sequential improvement just because some of the partners who purchased those have their business plans moving in one way or the other. So there's nothing specific around the wholesale both product that's going to drive changes in this quarter.
Got it. And second question, the guidance you gave for 2018, the free cash flow excludes preferred dividends, correct?
That is correct.
Next question comes from Michael Rollins with Citi Investment Research.
If I can refer you back to Slide 12, you provide the customer count between legacy and CTF operations. Looking at that slide, legacy down about 7% year-on-year. CTF down about 15%. Can you share with us how you look at the -- what contribution to that decline came from cord cutting, wireless substitution versus share loss to competitors? And then secondly on a later slide, you talked about fixed wireless trials in the CTF market. I'm curious if you can talk a little bit more about the experience that you're capturing with the fixed wireless deployment, and what you're aspiring to get to in terms of broadband coverage and fees ultimately within the CTF market.
Mike, this is Dan. I'll take the second question first. Really the wireless deployments that we're utilizing principally are out in some of the CAF deployment areas. And in those areas, we started out with delivering 25 MB to customers but moving up to 200 megabits as available. We've had very good success. It's a very economic approach towards serving customers in some of these areas. We plan to have an additional 44 sites built out in 2018 covering between 15,000 and 20,000 households. And in those areas, the customer experience has been very good so far. We're looking -- we deploy that unlicensed spectrum, and we're looking to participate in ways to firm that up with license spectrum over time depending upon some of the FCC initiatives.
Hey, Mike, it's Perley. On the consumer -- my slide 12 is ARPC, so I presume you're referencing a different slide, but I certainly understand your question which is really about the customer trend of CTF and legacy year-on-year. And I think we talked at length about the customer or the clients that we had at the end of '16, beginning of '17. And really those declines were -- as well as talk about what kind of -- our customer experience was disrupted. And those were -- those losses weren't -- we don't believe in the law of substitution, we believe that those are really mainly what I'd say cable competitors that those customers migrated to. As we have progressed through 2017, we have seen continued improvement on our CTF markets and in a very good place as we end '17 and '18 in CTF. So we believe we'll be able to take share back in 2018. And on the legacy side, as Dan talked about, there's a number of initiatives that we are working on. Clearly our CAF initiative is important on the legacy side because those are households that are not served with a fixed broadband connection today, which we believe is a great opportunity for us. And then we continue to improve our network across the copper side and make sure that we compete effectively on price where we are -- have a comparable network and we compete on value where our network might be seen as -- our speed might be seen as inferior, but we continue to improve on our speed as well.
Next question comes from Amir Rozwadowski with Barclays.
Just wanted to check on the dividend cut front, have you changed your expectations in terms of the ability to reduce leverage on the balance sheet as a result of the dividend cut? And how we should be thinking about sort of the progress from that perspective? And then secondly, when we think about sort of consumer subscriber trends continuing to improve, and your commentary that you expect positive growth of FiOS subscribers this year, how should we think about sort of the pace at which we should think about revenue growth trajectory? And I think it was about a $6 million improvement quarter-over-quarter relative to some of the declines in the prior quarters, and it seems that we're progressing towards that breakeven and sort of positive trajectory. Would love to hear your thought process around that.
This is Perley, I'll take your leverage question first. We still are -- we still believe obviously the -- clearly, the business has too much leverage on it, and our priority is deleveraging the business. Now we still believe that the leverage of the business needs to be not only below 4x but below -- at below 3.5x and that's where our target leverage has always been. As far as the sequencing of that, we'll have to see. We have expected our leverage to remain flat in 2017 and then be able to delever and didn't, our leverage went up in 2017. So -- but our focus is still getting the business delevered below 4x over the target of 3.5x.
Amir, on the consumer subscriber metrics, especially around CTF, I think as I pointed out, 2 out of the 3 markets that we acquired actually turned positive. I would say that at this point, we're on the cusp of really moving into the positive territory. And we expect to try and improve both ends of the equation so improving -- continue to work on retention and churn while at the same time really adding new channels to drive gross adds up a little further. And at the same time, we're moving pricing in some cases up associated with content price increases. And we really haven't seen any material impact on churns as a result of that. So we feel pretty good about it and we're seeing improvements virtually every day, every week as we execute on both sides of those equations.
Next question comes from Simon Flannery with Morgan Stanley.
It's Spencer for Simon, just a couple for me. So on Broadband, can you remind us where you are from a speed standpoint. And then on CAF, should we expect CapEx to be down in line with the rest of your budget? And lastly on integration restructuring, what are you guys budgeting for 2018.
Well, Spencer, let me take the network side. So today, we can service more than 4 million households with fiber-to-the-home. And then we'll be expanding that number as we complete organic growth in the areas we anticipate anywhere from 30,000 to 50,000 new households with fiber-to-the-home just through organic growth. We have a very large fiber-to-the-node footprint as you know with churn capabilities. For example, we can provide 100 megabits over copper to nearly 1 million households and at least 25 MB to almost 6 million households. And we continue to upgrade speeds and capacity as we go through the CAF program as well as some specific areas that we're targeting for speed upgrades in different markets. We're in the process of executing on the CAF. I think as you know the total upgraded possibility over time is 760,000 households. We have completed about 351,000 of those already. And a material portion of those get 25 MB or higher, but we had a minimum standard of 10. And we have about 5 million households that are video-capable, either with FiOS TV or Vantage TV. We have 30,000 commercial businesses and footprint with existing direct fiber drops, and we have about 180,000 backbone fiber route miles in our network.
And Spencer, it's Perley. We are not budgeting -- the integration is complete so there's no more integration or transition cost in our budget. I think we also have some restructuring. We expect to be about $30 million of restructuring cost. And then you asked about CapEx. Our CapEx guidance for the year, I don't know if you heard that earlier, was $1.0 billion to $1.15 billion. We believe that we were -- we're becoming better and better and more efficient at how we prioritize and spend our capital. And I think that's a good capital number for us. And we continue to invest in all of the right priorities in order to drive the top line in order to take cost out of the business.
I wasn't sure whether as part of that budget cap specifically was going to be flat or up. And then I guess as a follow up on the CAF, do you expect -- I guess, where is your penetration today? And I guess where is the goal over time?
You're saying on CAF, is that what you said?
Yes, on the CAF CapEx specifically.
On the CAF CapEx, yes. So our penetration across the entire CAF program, so CAF I and CAF II is roughly 30%. And our penetration is a little higher, is obviously closer to 50% on the CAF I program and will continue to drive the penetration on the CAF II program. We can put in those -- phase 1 was completed really at the end of 2017 with 40%. You should think about that as our sales and marketing teams now have a whole new set of households to go after in 2018 with -- as the engineering team gets another step ready in '18 that the sales and marketing team can go after in '19.
Next question comes from Scott Goldman with Jefferies.
I guess one on the guidance, just curious maybe you can help us think about what's embedded from both a revenue as well as perhaps, maybe cost cutting beyond the synergies in order to get to the EBITDA target that you've laid out. And then secondly, maybe just a little bit of a further follow-on to the last question. When you're looking at the legacy broadband, seems to me like CAF should be somewhat easy picking from a competitive standpoint. But just curious how you think about parsing out the legacy side between how competitive things are in those markets. You laid out some of the speeds, 25 megabits to 6 million homes. Are you facing 100-MB and 1-GB offerings from cable in a lot of those markets? And if so, I guess that would mean more sort of the value play that Perley was referring to earlier?
It's Perley, let me handle guidance, and I'll have Dan talk about kind of the legacy markets and CAF competition. So the best way to think about our EBITDA guidance is we expect continued improvements in revenue in 2018 over 2017. And we -- and while our cost synergy program is through Q2 of '18, we are firm believers that we can continue to take cost out of the business as the activities of the business change. So as an example if there are fewer customers and fewer activities, there is cost that can be taken out because of that. And so we're firm believers, and we'll continue to manage our cost structure accordingly. But we expect revenue to continue to improve in '18 over '17 and continue to focus on cost reductions.
Scott, I think you did your math correctly as far as the CAF goes. I think we do see that as a very interesting opportunity that we're starting to do better and better on execution. I think that as we were going through all the integration activities, it probably created different priorities for the consumer team. And now they are really focused on like the laser side. So I think you will see us start to do better and better there. We have been dealing with cable competitors that certainly offer higher speeds, 1-gig isn't prevalent, I would say, especially in a lot of our rural areas. We really haven't seen a major uptick in churn in some of those areas. And I think from our perspective as we reconstruct the legacy bundles, it gives us better line of sight and allows us to expose those bundles and the capabilities of the network in a multichannel way that allows customers to do much better self-seeking and self-service on either upgrades or changes in their product set where we think that's going to be a big change for us both from our current channels as well as self-service for customers. Those are the things that we're doing that we think really changes the game, and we really put the power in the customer -- in the hands of the customer as they are deciding on what their product will be going forward. But we really haven't seen a major uptick in churn despite the fact that we've been at a lower speed profile in some of the legacy copper markets.
And are you now marketing to all 350,000 or so CAF households that you've enabled?
Yes. We are marketing to those at this point. There was a big chunk that came in, in the fourth quarter as you know, and the team is going after that as one of the top priorities as we go into 2018. Good. As we close the call, I just wanted to leave you with the following thoughts and observations. So first, the extensive company-wide initiatives are translating into improving trends in financial results. For example, CTF consumer revenue were down only $11 million sequentially in Q4 versus a $65 million sequential decline in Q4 of last year. We're very confident that we will achieve stability in CTF. Likewise, we achieved a very substantial improvement in our CTF FiOS unit metrics in Q4 and we're almost at growth.
We have begun to deliver an improved trend in legacy consumer revenue with a $5 million sequential decline being the best sequential result in more than 3 years and a substantial improvement from the approximately $10 million sequential declines in recent quarters. And I'm confident that the programs that we're implementing will improve the unit trends over the coming quarters. SME revenue was roughly stable sequentially in Q4, and we are investing in new sales capacity in areas where we have identified opportunities. And finally, we remain fully committed to attaining our synergy targets, improving expense levels, increasing EBITDA and free cash flow and reducing leverage.
I just wanted to thank you for joining us today, and I look forward to updating you on our Q1 results.
Thank you. Ladies and gentlemen, that does conclude today's conference. We thank you for your participation, and you may now disconnect.