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Executives

Kurt A. Freyberger - Chief Financial Officer

Theodore H. Torbeck - Chief Executive Officer, President and Director

Analysts

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Julia R. Senior - BofA Merrill Lynch, Research Division

Ana Goshko - BofA Merrill Lynch, Research Division

Simon Flannery - Morgan Stanley, Research Division

Marc Patrick Andersen - Axial Capital Management, LLC

Joe Dancykier - UBS Investment Bank, Research Division

Cincinnati Bell (CBB) Q4 2012 Earnings Call February 27, 2013 8:30 AM ET

Operator

Good morning, everyone. Thank you, all, for holding, and welcome to Cincinnati Bell's Fourth Quarter Earnings Release Call. Your host for today's conference will be Kurt Freyberger. Today's conference will begin with prepared remarks, followed by a question-and-answer session. [Operator Instructions] Today's call is being recorded. At this time, I would now like to turn the call over to your host, Kurt Freyberger. Mr. Freyberger, your line is now open.

Kurt A. Freyberger

Thank you, and good morning. I'd like to welcome everyone to Cincinnati Bell's Fourth Quarter Earnings Call. With me on the call today is our Chief Executive Officer, Ted Torbeck. This morning, you will hear from Ted about the current state of our business and our 2013 outlook. I will then recap the 2012 results, and we will also provide our 2013 guidance. We will then conduct a question-and-answer session.

Before we proceed, let me remind you that our earnings release and the financial statements are posted on our Investor Relations website. In addition, you will also find the presentation slides for today's call, which we hope you will find helpful in your analysis. Today's call is being webcast if you'd like to listen to it at a future time.

Now I would like to draw your attention to our Safe Harbor statement, presented on Slide 3. In our remarks this morning, we will be discussing forward-looking information. Due to various risks and uncertainties, actual results or outcomes may differ materially from those indicated or suggested by any such forward-looking statements. More information on potential risks and uncertainties is available in the company's recent filings with the SEC, including Cincinnati Bell's annual form 10-K report, quarterly Form 10-Q reports and Form 8-K reports. This presentation also contain certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are also available on our website.

With that, I'm pleased to introduce Cincinnati Bell's Chief Executive Officer, Ted Torbeck.

Theodore H. Torbeck

Thanks, Kurt, and good morning, everyone. Thank you for joining us today. Before we get started, let me first say how excited I am to be the new CEO of Cincinnati Bell. I would also like to take this opportunity to acknowledge Jack Cassidy's contributions to the company. During his tenure as CEO, Jack made incredible strides to improve the value of our company. I'd like to thank him for his leadership, and I would also like to personally thank Jack for his support over the past several years, a support that he will continue to provide us in his new role as Vice Chairman of our Board. As CEO, I'm honored to be leading this company and its 2,800 hardworking employees. We have some of the best employees in the industry, focusing everyday on outstanding customer service and innovation. I have no doubt in our ability to take Cincinnati Bell to the next level.

Over my 34-year career, first operating various businesses at GE and later as CEO for a company sponsored by Cerberus Capital, I have learned the importance of investing for future growth, while at the same time optimizing current operations. With Cincinnati Bell, I see a company with solid existing wireline operations. I see a company with a great opportunity to invest in fiber for growth, and I see a company with an investment in a growing data center business that will ultimately allow us to repay debt to appropriate levels. In 2012, Cincinnati Bell delivered a solid financial performance while executing on a data center strategy, which as I mentioned, will fundamentally change this company's future leverage profile. With that said, in the near term, we face challenges. Our Wireless business faces intense competitive pressures from the national players. While our team has done a great job taking out cost to substantially offset subscriber declines over the past 3 years, it is becoming more and more difficult for us to fully offset these revenue declines with cost reductions. As a result, we believe wireless EBITDA in 2013 will decline by approximately $20 million from 2012 levels. We are reviewing all options available to us, and for now, we'll continue to manage this business with a focus on cash flow.

We will also continue to conduct our LTE trials and have yet to determine the extent of our LTE investment, if any. What is critically important to us in this decision is that the business case for any LTE investment must meet the substantial investment returns we expect from our fiber deployment.

I am confident in Cincinnati Bell's ability to innovate and grow. I believe that we have already developed the foundation that will provide the path forward. As you will hear shortly, our investments in fiber and the services that this product enables have begun to yield great results. Our fiber investments will be the foundation for turning the Wireline segment into a growing business, which yields significant sustained cash flows. To accomplish this growth goal, we will increase our capital investment in 2013 by $40 million to $50 million. This increased investment will occur in 2 primary areas. First, we will invest in laying more fiber. We believe in the quality and the long-term relevance of this asset and its ability to enable us to deliver the services customers want today and will want tomorrow while driving an attractive overall return. This fiber will be constructed to the consumer's home, through businesses and to wireless towers. Second, we will continue to invest in the services that are delivered over fiber. For the consumer, this is our Fioptics product suite, which provides entertainment, high-speed Internet and voice services. For the business customer, this ranges from wholesale connectivity to complex cloud and managed IT offerings. These services are not new to Cincinnati Bell. While the main focus over the past several years has been investing in data center growth, we have also been investing prudently in a strong foundation for our future. As we accelerate our capital investment, free cash flows will be negative in 2013. However, this acceleration is critical to driving the wireline revenue growth in 2014 and beyond.

Evidence of this strong foundation can be seen in the success we are achieving with our Fioptics product suite, as presented on Slide 7. We now pass 205,000 addresses and have 57,000 customers, representing a 28% penetration. In mature areas, where our service has been in place for more than 24 months, our penetration in single-family homes is over 35%, with an average revenue per household expanding by 15%. Kurt will provide further details on the Wireline segment in a few minutes, but I'd like to take a moment to highlight that Fioptics revenue grew 43% in the fourth quarter to $19 million. The strong response that we were seeing to Fioptics bolsters our belief that we have a superior product and gives us confidence to proceed with the full-scale rollout. Remember, we are still in the early innings of our consumer Fioptics product deployment, and believe we can profitably construct to about 60% to 70% of Greater Cincinnati homes and businesses. This represents $1 billion total market opportunity. By the end of 2013, our goal is to have passed approximately 35% of Cincinnati, which is halfway to our ultimate target.

Now turning to business and specifically, our wholesale carrier market. Our metro fiber investments will remain focused on wireless backhaul projects and last mile access for Metro Ethernet. The company currently generates combined revenue of approximately $80 million annually associated with these services. There are a number of new projects, which we have already won and several more for which the RFP process is ongoing. As you know, these projects are very attractive given their long-term committed nature and solid returns.

For our retail business customers, we are focused on increasing market share and the breadth of services we are providing in the 3,600 buildings and towers we currently have lit at our Metro fiber footprint. We believe we can earn a larger share of our business customers' wallets, and we'll focus on further dominating this market. We are confident in our ability to continue our success in this space, and we plan to construct fiber to several hundred new multi-tenant buildings in Cincinnati.

For other business services, fiber optics connectivity continues to be an enabling technology that allows Cincinnati Bell to deliver customers an end-to-end experience with one trusted partner. These services, combined with our robust metro fiber assets, clearly differentiates Cincinnati Bell from other pure-play competitors. We offer services which range from a simple, hardware sale or a traditional voice service to a fully managed solution that includes high-speed net data networking, data backup and storage, VoIP and hosted Cloud services. Lastly, with a focus on optimizing operations in order to maximize returns, we have begun to integrate our business Wireline sales and operations teams together with CBTS, our entity that runs the IT Services and Hardware segment. Not only will we achieve operational and product synergies with this consolidation, we will also create a platform to better serve our mid-market customers, both within Cincinnati and outside our traditional operating territory. We have assessed this market opportunity to be approximately $250 million in Cincinnati alone. The combination of expertise within these 2 business units has already yielded great short-term results in expanding our presence. For example, these teams have recently been awarded a large state-wide manage voice over IP contract that will result in the billing of roughly 50,000 managed handsets within the next several months, majority of which are outside our traditional operating area. Once fully ramped in 2014, this one contract will result in annual revenues of $8 million. This is only one example of mid-market opportunities that we will be focusing on in the future.

We have also begun combining expertise around our cloud-based platform management. The combination of products from these 2 entities yields a suite of cloud offerings that has grown at a 25% CAGR over the last several years, and it is expected to pass the $1 million mark in monthly billings in 2013. Though small right now, these are profitable, high-return revenues. I've been with Cincinnati Bell since 2010 in the role of President and General Manager of Cincinnati Bell Communications. This experience has been very valuable to me as I lay out our fiber-focused strategy to move Cincinnati Bell towards further success. We look forward to articulating our strategy in more detail over the coming months and hope that you are as excited about our future as we are.

To reiterate my opening remarks, Cincinnati Bell is a company with a solid existing wireline operation, with a great opportunity to invest in fiber assets and services for future growth, and an investment in CyrusOne, which will allow for significant debt paydown. As we execute our strategy, I believe the acceleration of fiber investments in 2013 will return Cincinnati Bell's Wireline business back to growth in 2014, and over time will generate significant free cash flow.

I will now turn the call over to Kurt to review our results.

Kurt A. Freyberger

Thanks, Ted. I'd like to echo Ted's remarks. We are pleased with our 2012 results as we met or exceeded the financial guidance we provided. As we move forward, we see opportunity in growth in our strategy as a fiber-based company in 2013 and beyond.

Please turn to Slide 9, which shows the key highlights for the full year of 2012. Net revenue of $1.5 billion was in line with our expectations. Adjusted EBITDA of $535 million included an $8 million mark-to-market charge required on certain compensation plans as a result of the increase in the company's stock price during 2012. Even with this charge, we exceeded our EBITDA guidance by $5 million. The IPO of CyrusOne in January of this year culminated a remarkable effort by our company to unlock the value in our Data Center business. Our strategy was clear, use the cash flows generated by the communications group to accelerate the investment in our high-growth, high-return Data Center business. We were steadfast in our approach, and the $480 million received from CyrusOne in the fourth quarter to pay down our corporate bonds was the first of many steps towards reducing our debt to a level appropriate for a telco. We believe our remaining 69% ownership in CyrusOne will continue to reward our shareholders.

Turning back to the results for 2012, as shown on Slide 10. Total annual revenue increased by $12 million from 2011. This was largely due to increases of $37 million from CyrusOne and $15 million from the IT Services and Hardware segment. Revenue growth was partially offset by lower revenue from Wireless as a result of subscriber losses. As shown on Slide 11, full year adjusted EBITDA of $535 million was down $10 million compared to 2011, primarily as a result of the $8 million mark-to-market charge I previously mentioned. By business group, adjusted EBITDA from CyrusOne increased by $13 million compared to 2011. EBITDA for the communications group decreased as growth from our fiber-based services was more than offset by losses on our legacy products.

For our Wireline business on Slide 12, revenue for the quarter was $182 million, flat compared to the prior year when taking into account reductions of revenue in 2011 for onetime credits. Fioptics revenue was $19 million in the quarter, up 43% compared to the same period in 2011. Revenue from enterprise for fiber-based services and VoIP products also increased $2 million year-over-year, contributing to the increase. Wireline adjusted EBITDA for the quarter was $84 million, resulting in a margin of 46%, which is consistent with the third quarter of 2012, but down from the 49% margins achieved in 2011. Our wireline margin was affected by the loss of high-margin access lines and costs associated with acquiring new Fioptics customers and expanding the network. Our Wireline EBITDA margin remains strong by industry standards. Our team has done an outstanding job, taking costs out of the business, resulting in more than $10 million of annual savings in 2012 alone. We expect this focus on cost-out initiatives to continue into the future. An example of this, which Ted touched on, is the recently launched initiative to combine our Wireline business sales and operations groups with the CBTS group. This will result in $5 million of annual cost reductions for the company, and this will also provide a more effective and consistent go-to-market approach for our business customers, and is but one example of the opportunities that we focus on daily.

As noted on Slide 13, we continue to experience success with our Fioptics product suite. We ended the year with 205,000 homes passed, 57,000 Fioptics high-speed Internet subscribers and 55,000 entertainment subscribers. This equates to a customer penetration rate of 28%. In neighborhoods, where Fioptics has been offered for 24 months or more, we have penetration rates in single family homes in excess of 35%. This is also very strong by industry standards. We added 5,000 net Fioptics subscriber in the quarter, and our year-end subscriber totals are up approximately 40% compared to 2011. This is exciting growth for us, and resulted in an annual EBITDA increase of about $8 million compared to 2011.

As noted on Slide 14, our success in Fioptics has resulted in an additional 2,000 high-speed Internet subscribers at the end of 2012 compared to the same period in 2011, as the growth in Fioptics high-speed Internet subscribers has more than offset the loss of our legacy DSL subscribers. This is a particularly impressive result, given the saturation of the high-speed Internet market in Cincinnati. Access line loss continued to be controlled at 7.6% in 2012, a slight improvement from the 7.8% loss we experienced in 2011.

Our Wireless results are presented on Slide 15. During the quarter, we lost 19,000 postpaid subscribers, which contributed to a 17% decline in wireless revenue to $57 million for the quarter. Postpaid churn for the quarter was high at 3.2%. We saw increased pressure as the national carriers offered compelling holiday promotions, highlighting premier handsets on their new LTE networks. This drove up our churn for the quarter. Wireless adjusted EBITDA was $17 million for the quarter, resulting in a strong margin of 30%. The efforts of the wireless team to reduce costs and achieve the 2012 annual EBITDA margins of 35% is quite an achievement when considering the 13% year-over-year subscriber losses that we incurred.

Results from the IT Services and Hardware segment are on Slide 16. Revenue for the quarter was $87 million, an increase of $11 million compared to 2011, and largely attributable to an additional $10 million of hardware sales from our enterprise customers in the fourth quarter. Adjusted EBITDA was $4 million in the quarter, with adjusted EBITDA margins of 5%, both of which are comparable to the fourth quarter of 2011.

Turning to debt on Slide 17. Our net debt of $2.1 billion, which excludes net debt of CyrusOne, is 5.4x 2013 EBITDA guidance. However, if debt is reduced for the market value of our investment in CyrusOne, the adjusted leverage ratio will be 2.9x 2013 EBITDA, already well within an appropriate leverage range for a telco.

Our liquidity position is presented on Slide 18. As a result of the fourth quarter paydown of our 2015 bonds and other debt, we have no bond maturities until 2017. Also, our year end liquidity remains high at $240 million, which excludes the debt in cash of CyrusOne.

Now I'd like to address our guidance, as presented on Slide 19. In 2013, we expect revenues of $1.2 billion and adjusted EBITDA of $390 million, plus or minus 2%. This guidance amounts exclude CyrusOne. To be clear, after the CyrusOne IPO, although we continue to own 69% of the economic interest in CyrusOne, we do not control the entity, and therefore, will not be including CyrusOne in our consolidated results.

Although we are not providing specific free cash flow guidance for 2013, I'd like to provide you with additional cash flow information as presented on Slide 20. As Ted mentioned, we're accelerating our fiber buildout given the success of Fioptics and our fiber-based business products. This acceleration is the central driver to returning our Wireline business to growth in 2014. As a result, we expect our capital expenditures to be in the range of $180 million to $190 million for 2013, which excludes CyrusOne operations. We expect 2013 interest payments to decrease to about $175 million as a result of the fourth quarter of 2012 paydowns of corporate bonds and other debt. Pension and OPEB payments will be about $65 million, which represents an increase of $15 million compared to 2012 as a result of a one-time catch-up of previous funding deferrals. The annual run rate for dividends from CyrusOne totals $28 million, but we will only receive 3 quarterly dividend payments in 2013, totaling $21 million, given the first quarter timing of the IPO.

Cash taxes will remain minimal in 2013 at around $5 million. Importantly, our increased capital spending plan in 2013 will accelerate the inflection point in our Wireline business. As a result, we expect Wireline growth in 2014. We also expect positive free cash flow in 2014 from a combination of improved Wireline cash flows, reduced interest payments if we monetize a portion of our CyrusOne investment and capital management if necessary. Outside of our normal free cash flow, in the first half of 2013, we will also be making one-time payments of between $40 million and $50 million to employees related to the excess -- the success of our CyrusOne IPO. These payments are made in accordance with our 2010 TSS plan agreements.

I will now turn the call back over to Ted for his closing remarks.

Theodore H. Torbeck

Thank you, Kurt. To summarize my thoughts, I am extremely excited about the success associated with our fiber products. With our increased investment in 2013, we expect to pass about 35% of Cincinnati with Fioptics, getting us to half of our ultimate goal. This acceleration is critical for us to achieve necessary economies of scale and will enable us to conclude the year with an annual revenue run rate for Fioptics of $100 million. We also expect the strategic and cost synergies related to the integration of our Wireline business operations with CBTS to be completed in 2013. The combining of these groups will improve our business go-to-market strategy, particularly in the mid-market space and generate increased future revenues. I am privileged to be leading this company and its hardworking employees, and I'm confident in our ability to execute. I know I speak for them in saying that we all look forward to the opportunities in front of us.

This concludes the prepared remarks for today's call. We will now open the conference up to questions. The moderator will give you instructions to participate.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Frank Louthan with Raymond James.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Can you give us a little bit more breakdown on the CapEx between the various fiber builds between the buildings and Fioptics? And I'm just curious from a build perspective on Fioptics, are you -- do you have that ramped as quickly as you think you can on the build schedule? Are you throttling that a little bit? I mean, it seems in a year when you're making some pretty heavy investments, you'd probably want to do that as fast as possible, but just what's sort of your maximum amount that you can pass? And when can we expect to get that other half of the homes that you're trying to address?

Theodore H. Torbeck

Okay, Frank. We're going to -- from a capital perspective, we will spend about, on the consumer side, about $73 million on the consumer and about $13 million on the business side for investment. Again, I think it's a ramp up. If you look at the ramp up in consumer, $50 million to $75 million roughly, it takes -- you got to train people and so forth so it's -- we're moving, I think, as fast as we want to in a controlled fashion. As we've mentioned earlier, this product is still relatively new, and we got to make sure that we do it the right way, and so that's kind of how we're focusing on it. Our performance in executing on installs and so forth is also very important.

Kurt A. Freyberger

Frank, on the Fioptics, we spent a little less than $50 million this year, and so it's about a $25 million increment associated with Fioptics and the -- as Ted mentioned on the business side, there's probably a 13 to high teens, close to 20 type incremental investment that we're -- that we're intending to do there as compared to 2012.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Okay. So the $73 million and the $13 million, those are -- that's sort of incremental? Is that sort of...

Kurt A. Freyberger

No, Frank...

Julia R. Senior - BofA Merrill Lynch, Research Division

Can you break out sort of the $180 million to $190 million? Can you give us some various -- some buckets so we can have some idea of where that's going?

Kurt A. Freyberger

Right. So if you look at our results for 2012, it was right around $140 million, and included in that is right around $50 million for Fioptics. What I'm saying is we're spending another $25 million on Fioptics to get to that $73 million to $75 million kind of number that Ted gave. And then we're spending another $15 million to $20 million on additional business investments for the Metro Ethernet investments Ted talked about.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Okay, got it, that's helpful. And then what's the total number of buildings -- I think you mentioned 3,600 or so that you got lit in the market. What's sort of the total number of buildings that you think are addressable over time that you're targeting to run fiber to?

Theodore H. Torbeck

Well, we got 3,600 today. We look at adding this year another 400. That's roughly what we're looking at building out to.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

What's the total addressable market?

Kurt A. Freyberger

It's about 5,000, Frank, maybe 5,000 buildings.

Theodore H. Torbeck

Yes.

Operator

And we'll take our next question from Ana Goshko with Bank of America Merrill Lynch.

Ana Goshko - BofA Merrill Lynch, Research Division

Two questions, if I may. First, I just wanted to understand on your comments on exploring options for the Wireless business. Is this a formal process where you're looking at sort of strategic alternatives and speaking with advisors about looking to potentially monetize that business?

Theodore H. Torbeck

Ana, we are. We're exploring all opportunities and that includes -- it is a formal process.

Ana Goshko - BofA Merrill Lynch, Research Division

Okay, that's good to know. And then secondly, and I know you didn't give free cash flow guidance for the year, but if I do add up all the different free cash flow items, it is negative. So a couple of questions around that. One, do you have an estimate for working capital for the year, whether it could be a use or a source? And then secondly, how do you plan to fund the negative free cash flow implied by the different guidance metrics?

Kurt A. Freyberger

Ana, this is Kurt. On working capital, I think you probably noticed in the earnings release that there's roughly $30 million of negative working capital for 2012. A big portion of that was associated with CyrusOne as they increased their sales and had to kind of -- had to support that increase with increased working capital both from receivables and payables and so, while I do think we'll -- on the working capital side, I think we'll maybe have $10 million or so of working capital needs. I don't think it'll -- it won't be the levels that it was this year. I would point out though, when you look at our free cash flow calculation, I gave a lot of the information that I thought was important in terms of change. You still have to put in all the normal things like the preferred stock dividends and things like that into our normal free cash flow calculation and working capital as well, as you mentioned.

Ana Goshko - BofA Merrill Lynch, Research Division

Okay. And then the follow-up on that was, do you plan to draw on revolver or your AR facility to fund the overall cash use in the year?

Kurt A. Freyberger

Well, our AR facility is our cheapest debt. So we'll draw on that first. We may need to draw into the revolver as well in order to fund the negative free cash flow for the year, but that's -- we'll first use up the AR facility.

Operator

And we'll take our next question from Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley, Research Division

First, on the CyrusOne stake, how are you thinking about that investment as you go through to the lockup expiration early next year? Is this something that if the price is right, you would look to sell the majority of your stake? Or do you think it's something where you may sort of take 3, 5 years or even hold onto it longer than that? And then on the Fioptics buildout, you said 35% this year, getting to 70% so does that mean that this level of capital spending is something that we're likely to see for sort of a 3-, 4-year period?

Theodore H. Torbeck

Okay. Thanks, Simon. First of all, on the CyrusOne, first of all, we're very bullish on CyrusOne, although we don't want to be a portfolio company. We still remain very bullish on the growth prospects. We do have a 365-day lockup so we won't sell any interest until 2014. At that time, the things we will consider are CyrusOne's performance, what their expected future performance will be -- we'll look at our performance. We look at how we're doing on returns with Fiber Optics. We'll look at our costs and look at our level -- our debt. It's really a good position to be in. It gives us an option that we didn't have before so we're pretty excited about it. So that's on the CyrusOne question. On the Fioptics buildout, we have -- we'd like to get to 60% to 70% of the city. We're currently at around 25%, 26%. We'll hit 35% by the end of the year. What we'd like to do in the next 4 or 5 years is to get to that 60% to 70% level. That's what we're planning on to do. So we'd like to keep our investment somewhere in that range, but we have other elements, other levers that will drop to get us down to a positive cash flow situation in 2014.

Simon Flannery - Morgan Stanley, Research Division

Right. And does the business fiber investment, is that something that's multiyear as well?

Theodore H. Torbeck

We'll keep it up until we see the returns, and as we mentioned, we got 4,000, 5,000 buildings that we'd like to get reviewed and each one of them, we have to pass a return number so -- yes, we'll keep investing as long as returns are good.

Kurt A. Freyberger

This is all success based. This reminds me a lot of the data center investment, where you invest and you can pretty quickly see whether you're getting the penetration that you should be able to get to get the appropriate returns, and if we can get that, we'll keep investing, but it's success-based. We won't keep -- we won't put money in if we're not getting the kind of returns and customer penetration that we think we need to have to get the right economics.

Operator

And then we'll hear now from Simon Flannery with Morgan Stanley. That's who we just heard from. Now we'll hear from David Barden with Bank of America.

Julia R. Senior - BofA Merrill Lynch, Research Division

This is Julia for Dave. Can you talk a little bit about your 2013 margin guidance? It implies a little bit of a compression year-over-year. I mean, is that mostly coming from erosion on the Wireless side? Or is it higher spending on Wireline as well? I guess, let's start with that.

Kurt A. Freyberger

Julia, this is Kurt. I think you'll -- I think with Wireline, we'll -- I think that phenomena will continue in that we're losing our high-margin legacy products, and we're replacing it with highly profitable but lower margin fiber products, and so I think you'll see a slight compression in Wireline, and I think you'll also continue to -- with Wireless, if you start doing the math, I think you'll start seeing a slight compression there.

Julia R. Senior - BofA Merrill Lynch, Research Division

Okay, great. And then if I could just follow up a little bit on your growth expectations on Wireline for growth in 2014, that's actually a little bit slower than I was looking for. Can you talk about sort of the puts and takes there and what needs to happen to get the growth?

Theodore H. Torbeck

Again, it's getting -- one is getting our coverage greater on fiber. As we mentioned, we're about 25%, 26%. We got to get more coverage out there, and that's part of the plan to accelerate the investment. So that's important. As you can see, we get good penetration rate. We get about 28%, but after about 24 months, we realized somewhere in the neighborhood of 35% penetration rate. So that is great potential growth. And then on the business side, we got about 50% market share in the 3,600 buildings that are lit. We're going to try to keep getting more there, as well as the new buildings, the 400 buildings that we're going to light there. So it's really just getting the coverage greater and continuing at the penetration rate success that we've had.

Operator

And we'll hear next from Bruce Roberts [ph] with Roberts Equity Research [ph].

Unknown Analyst

I had some questions on -- just in general in terms of when you're breaking out the business strategy from the Fioptics, what -- if you look at the Wireline business, what percentage of it is sort of, if you will, residential and what percentage of it is business? And when you look at the growth that you're going to experience in 2014, how much of that growth is coming from each of those 2 segments? And then I have a follow-up on Fioptics in particular.

Kurt A. Freyberger

Bruce, this is Kurt. As far as the incremental growth that you're going to see over the next several years, it's split pretty much 50-50. You'll see -- as I've mentioned before, when we've had the $40 million to $50 million per year of Fioptics capital, you can expect to see $8 million to $10 million of annual increases from EBITDA on that side. That's going to be -- as we increase this investment, you can kind of use that same line of thinking into the future, and you're going to see that same kind of increment on the business side as well.

Unknown Analyst

Okay, that's helpful. And then on Fioptics, I was wondering -- oh, just one other question on business side, does your business strategy include a CLEC strategy or an outer region strategy or is this going -- is this all going to be in-region?

Theodore H. Torbeck

Well, if you look at '13, our primary focus, primary, is really focused on Cincinnati. However, we do have -- we have customers, local customers that would like to expand regionally and we'd like to go with them. So that's kind of how we're doing it. We do have some activity going in other cities on the CBTS side, but our primary focus in '13 is focused in Cincinnati.

Unknown Analyst

Okay, great. And then the other question I had was in terms of Fioptics, I mean, you guys are growing very quickly there and have very ambitious plans there. What tools and levers are you pulling to get to those numbers in terms of penetration and in terms of putting out your network? Is it -- are you competing a lot on price? Are you competing on a superior product or a combination of the 2? If you could just give us a sense of what's the competitive dynamics. And then the other thing I want to know is, as we speak or maybe you're sitting at 27% penetration, maybe that's not a good time to ask this question, maybe when you're sitting at 33% penetration, the better time to ask a question. But generally speaking, what's sort of the EBITDA margin that you're generating in Fioptics, if you could?

Theodore H. Torbeck

Okay. First of all, on the -- some of things that we're doing different, one is we're going to start mass marketing. We have, for the first time, at the Super Bowl, locally, we had our first commercial that went to the masses in Cincinnati so that's one positive thing. We absolutely have a superior product. There's no doubt about it, and so that's one thing. We also have a very good direct sales force. We call it door-to-door. We are growing that this year to accommodate the additional growth. We are looking at price though as we go head-to-head with Time Warner primarily. That's -- we do give -- we have to be competitive from a price perspective, but we believe that we got a superior product. We got a great sales team, and the fact that now we're mass marketing, all of those are real positives for us. As far as the margin is concerned, we're about 40% and higher. I think we're at 46%.

Kurt A. Freyberger

Right. So if you look at the Wireline margins that are around 46% now, with the Fioptics product, once we get to full penetration, we'll have lower margins than what you're going to see on that average Wireline. Again, that Wireline margin includes the very high-margin legacy products and so our Fioptics products, once we get the full penetration, it will be somewhat less than that 46%, primarily because of the programming costs and other things that kind of go along with that Fioptics product, but it's still highly profitable, high returning based on the investment that we have. It's just doesn't compare to those legacy copper products.

Operator

We'll take our next question from Marc Andersen with Axial Capital.

Marc Patrick Andersen - Axial Capital Management, LLC

Yes, I have 2 questions. One is the warrants that come due in March. How will that affect your diluted share count or I guess your basic share count at the end of March? And then the second question is what is the funded status of your -- both your pension and your post-retirement obligations at the end of the year?

Kurt A. Freyberger

Okay. This is Kurt. So on the warrants, there's about $14 million that are still outstanding. They expire in March. At a $4.25 kind of share price, where we are, that's about another 4 million. Those can be -- those are essentially cashless exercises or they have been historically, and so we'd expect that to happen as well in March. And so it's maybe another 4 million shares that would be added to our share count. On the pensions and the OPEB, we still remain underfunded. One of the plans is less than 80% and the other -- there's a second plan, which is about 60% to 65% funded. So we still do have -- as we disclosed in the 10-K last year and is what we're going to disclose this year, we still have several years of funding ahead of us to get back to where that plan is funded in accordance with the federal guidelines. What I'd tell you is that on the pension and OPEB payments this year, it's going to be about $65 million, as I remarked before. We'll see a big decline back to 2012 levels of around $50 million, starting in 2014. We had a onetime kind of catch-up because of some previous deferrals that we were able to do. We have about -- we have a onetime catch-up in 2013, but you'll see that -- assuming everything else stays the same, which is I guess -- assuming everything else stays the same, you'll see a big decrease back down to the $50 million level starting in 2014.

Marc Patrick Andersen - Axial Capital Management, LLC

And the total dollar value of the unfunded status is how much across the 2?

Kurt A. Freyberger

It's roughly $300 million.

Marc Patrick Andersen - Axial Capital Management, LLC

And I guess that leads to my next question, which is -- I know there's a lockup associated with the CyrusOne stake that you own. Have you considered contributing the CyrusOne stock, and I don't even know if you can, to the, I guess, remedy some of the unfunded nature of both those plans? I know you could sell it in a year, but can you contribute the stock today? Are there restrictions on contributing the stock today to the funds?

Kurt A. Freyberger

There are restrictions. It's a certain -- I think it's like 10% of the plan assets is what you're limited to on the contribution of a related party stock.

Operator

And we'll take our next question from Batya Levi with UBS.

Joe Dancykier - UBS Investment Bank, Research Division

This is Joe, asking for Batya. Do you guys think you can grow total broadband subs as you look to grow the Wireline business in 2014? And I have a quick follow-up.

Kurt A. Freyberger

The answer is yes. We think our -- with these additional investments, we think our Fioptics subs, starting at least in 2014, we believe the Fioptics subs will outrun our DSL losses.

Joe Dancykier - UBS Investment Bank, Research Division

Okay. And then how can we think about the valuation and use of the NOLs, going forward, post the IPO CyrusOne?

Kurt A. Freyberger

Our NOLs are right around $1 billion right now. And our intention would be -- we believe as we monetize CyrusOne over the next couple of years, we'll be able to shelter the gains on -- that we would realize on those monetizations with the NOLs.

Joe Dancykier - UBS Investment Bank, Research Division

And would there be any excess NOL left over after that?

Kurt A. Freyberger

I hope not.

Operator

That does conclude today's question-and-answer session. Mr. Freyberger, at this time, I will turn the conference back to you for any additional or closing remarks.

Kurt A. Freyberger

Great. Thanks, everyone. This concludes our call for today. We'd like to thank everyone for joining us.

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