Cincinnati Bell Inc. Q1 2009 Earnings Call Transcript

| About: Cincinnati Bell (CBB)

Cincinnati Bell Inc. (NYSE:CBB)

Q1 2009 Earnings Call

May 5, 2009 10:00 am ET


Shane Brown - VP Business Development

Jack Cassidy - President, CEO

Brian Ross - COO

Gary Wojtaszek - CFO


Batya Levi - UBS

Frank Louthan - Raymond James

Daniel Gaviria - Morgan Stanley


Welcome to Cincinnati Bell's first quarter Earnings Call for 2009. Your host for today's conference will Mr. Shane Brown.

At this time, I would like to turn the call over to your host, Mr. Brown.

Shane Brown

I'd like to welcome everyone to Cincinnati Bell's first quarter earnings call. With me on the call today are President and Chief Executive Officer, Jack Cassidy; Chief Operating Officer, Brian Ross; and Chief Financial Officer, Gary Wojtaszek.

This morning you'll hear from Jack about our first quarter highlights and focus areas, followed by Brian's comments on operational metrics and Gary's comments on segment financials. We will then have a question-and-answer period.

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

Now, I'd like to draw your attention to our Safe Harbor Statement. Information in today's presentation contains certain statements and predictions that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. In particular, any statements, projections or estimates that include or reference the words believes, anticipates, plans, intends, expects, will or any similar expression fall within the Safe Harbor for forward-looking statements contained in the Reform Act. 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 Securities and Exchange Commission, including Cincinnati Bell's annual Form 10-K report, quarterly Form 10-Q reports and Form 8-k reports.

This presentation also contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are also included on our website. The forward-looking statements made on this conference call represent the company's estimates as of May 5, 2009. The company anticipates that subsequent events and developments will cause its estimates to change.

With that, I am pleased to introduce Cincinnati Bell's President and Chief Executive Officer, Jack Cassidy.

Jack Cassidy

Thanks, Shane. Good morning, everyone. We very much appreciate you joining us today. As announced earlier this morning, Cincinnati Bell results for the first quarter of 2009 reflected the impact of a softer economy in our local market area.

During today's call, we will review first quarter performance and discuss various measures that we are taking to maintain revenue, profitability and cash flow, as we manage through this challenging economic environment. I would like to start by reviewing some of the highlights of the quarter, which are shown on slide five of the presentation.

In technology solutions, revenue from data center and managed services exhibited strong year-over-year growth, which contributed to a 16% increase in segment EBITDA. We also completed construction of incremental data center space and began serving new customers from our downtown Cincinnati and Lebanon, Ohio, locations.

In wireless, smartphone momentum led to higher data revenue and stability in service revenue, while actions to address postpaid churn resulted in significant improvement on this important metric. We have more work to do in regards to churn, but are encouraged by sequential improvement of 70 basis points during the quarter.

In addition, an independent study based on drive tests in February and March confirmed for the third time that Cincinnati Bell's customers are using the best wireless network in Cincinnati and Dayton. Brian will provide more detail on the wireless performance in a few minutes.

In wireline, we renewed our focus on leveraging the value of bundling with the launch of our new Priced for Life campaign on March 9. This unique program allows residential customers to establish a permanent monthly rate for a bundle of two or more services without a contract. We have already enrolled more than 60,000 new and existing bundled customers, which represent slightly over 10% of Cincinnati Bell consumer households.

As shown on slide six, revenue for the first quarter totaled $326 million and reflected the positive impact of growth in data center and managed services as well as wireline revenue. Revenue from telecom and IT equipment sales declined year-over-year as enterprise customers dealt with capital constraints.

First quarter EBITDA was $113 million, as noted on slide seven. Improvement in EBITDA from technology solutions was offset by declines of 3% from wireline and 18% from the wireless segment. Gary will be sharing more about year-over-year variances in a few minutes.

For the quarter, earnings per share was $0.12 compared with $0.04 in the first quarter of 2008. Excluding special items, we earned $0.10 per diluted share, which was unchanged from a year ago as lower interest expense and overall reduction in shares outstanding offset the impact of the EBITDA decline.

Although some enterprise customers may have scaled back on telecom and IT equipment purchases, we continue to see strong outsourcing activity as companies look for ways to reduce their own IT budgets. Our Cincinnati Bell technology solutions data center business model is unique, because we can accommodate customers who prefer to buy space in two separate facilities in order to achieve simultaneous data replication. This was the case with one of our newest customers who moved their data center business from the United Kingdom to Cincinnati.

As explained on previous calls, a key factor in EBITDA growth from technology solutions is the ability to keep pace with demand for data center capacity. The chart on slide nine summarizes data center expansion activity over the past five quarters.

Our billable data center capacity is now 271,000 square feet, and we began billing 25,000 square feet during the first quarter, thus leading to a utilization rate of 77%. At the end of March, approximately 40% of the new space commissioned in the quarter was sold. Currently, we are in negotiations with customers for 15,000 square feet and are seeing interest from companies who are looking to purchase rather than build new incremental data center space.

In summary, we are maintaining our focus on creating solutions that deliver additional value for the customer. We introduced Priced for Life and are pleased with the level of activity thus far. We expanded our wireless handset lineup with the addition of the new BlackBerry Curve 8900 and the Pearl Flip 8220.

Also, on Friday, May 1, we launched the Nokia 5800 XpressMusic touchscreen smartphone, a device that is seeing positive acceptance in global markets. We are the first carrier to launch the Nokia 5800 in the United States and believe this will have strong market appeal.

To help lead the efforts to leverage Cincinnati Bell brand in an intensely competitive marketplace, we have expanded our executive team to include as Tara Khoury as Chief Marketing Officer. Tara has been active in marketing and general management for more than 25 years, with an emphasis on leading the marketing efforts of some very well-known consumer goods companies.

Now, I'd like to turn the call over to Brian Ross who will provide insight on our operational performance in the first quarter.

Brian Ross

Thanks, Jack, and good morning, everyone. As Jack describes, Cincinnati Bell is managing through a challenging economic environment. My remarks today will focus on business segment results for the first quarter.

Starting with slide 12 of the presentation, wireless service revenue equaled $71 million, down 1% from the first quarter of 2008. Postpaid service revenue was up, reflecting ARPU growth offset by a 2% decline in the number of subscribers. Postpaid ARPU of $48 was up 1%, which included data ARPU growth of 26%.

One area in which we clearly saw the impact of a softer local economy was lower postpaid minutes of use, which resulted in lower postpaid voice ARPU. Gary will have more to share in a few minutes about this trend as similar to what some of the national wireless carriers reported in their first quarter operational metrics.

A key factor in the stronger data ARPU results was consumer smartphone growth as shown in slide 13. In the quarter, subscriber rates increased 62% year-over-year, resulting in a 13% penetration of the postpaid base. Wireless EBITDA totaled $18 million, down $4 million or 18%. Factors contributing to lower EBITDA included decline in postpaid usage, competitive pricing pressure and prepaid increased bad debt and a higher level of handset subsidies.

In the area of postpaid churn, we are seeing the results of initiatives taken to address higher churn experienced in the second half of 2008. In slide 14, you can see the monthly improvement as further tightening of credit standards implemented in November 2008 have brought involuntary churn back to a more historic 0.3% level.

Over the past few months, we have been able to generate sequential monthly improvement in churn from the December 2008 peak. You heard Jack describe the new additions to our handset lineup. Both the new BlackBerry Curve 8900 and the Pearl Flip 8220 include UMA technology, which means that customers can add on our Fusion WiFi service to get free WiFi minutes, faster data speeds and better coverage in the home or office.

In addition, Cincinnati Bell is the exclusive North American carrier for the Nokia 5800 XpressMusic touchscreen smartphone. We believe these steps to close the gap between Cincinnati Bell and other wireless carriers in terms of handset selection will also have a positive impact on churn.

Looking at prepaid performance, we have been combating aggressive rate plans that Cricket introduced in October of 2008. Having anticipated their actions, we are successfully defending our share as evidenced by a 10% sequential increase in service revenue and a 4% sequential increase in subscribers as shown on slide 15. Competitive rate plans and revised third-party dealer compensation have helped to drive churn to its lowest point since the second quarter of 2005.

Turning to DSL in slide 16, despite the maturity of this product category, our subscriber base grew 3% year-over-year on 2,000 first quarter net activations. Although our Priced for Life results had only a slight effect on first quarter results, we are seeing positive early trends in DSL units and ARPU metrics.

Slide 17 illustrates access line performance over the past five quarters. In total, access lines declined 6.7% in the quarter with an 8.5% decline in our traditional service area. We did see a contraction of business access lines in the quarter. This is partially due to the weaker economy as well as the proactive migration of our customers to our new eVOLVE product line, which provides VoIP solutions in lieu of traditional access lines.

Turning to the technology solutions segment, the charts on slide 18 illustrate year-over-year performance for the segment's seasonally weakest quarter. Total segment revenue was $63 million, down 16% from a year ago. Restrictive IT budgets and bank credit slowed hardware sales, which has reduced overall segment revenue growth well below its approximate 20% trend.

However, as Jack mentioned, data center and managed service revenue continued to be strong as we sold more than 55,000 square feet or 35% more data center space at the end of the first quarter of 2009 versus the same period a year ago. This partially offset the drop in lower margin telecom and IT equipment revenue and resulted in a $2 million increase in the segment's gross profit. EBITDA for the quarter was $8 million, up 16% year-over-year.

Now, I'll turn the call over to our Chief Financial Officer, Gary Wojtaszek.

Gary Wojtaszek

Beginning with slide 20, Cincinnati Bell's net income for the quarter was $29 million or $0.12 a share, up $0.08 a share from a year ago This improved performance was primarily driven by a $5 million reduction in interest expense and a $32 million improvement in restructuring and related charges, which more than offset the lower EBITDA performance that Jack and Brian previously discussed.

As depicted on slide 21, we made considerable progress this quarter executing our share repurchase program. During the quarter, we bought back 11.5 million shares or 5% of our outstanding shares. The cost of the repurchases totaled $21 million, which represents an average purchase price of $1.86 per share. As shown, we have bought back approximately 13% of our outstanding shares since we commenced the share repurchase program last February.

We did not repurchase any bonds in the first quarter as they traded up nicely from the lows experienced in the fourth quarter of 2008. We believe that our equity this quarter was relatively undervalued, especially when considering how well our debt recovered from its fourth quarter lows of around 70% of par to well above 95% of par.

Also in the quarter, we refinanced and increased the size of our accounts receivable securitization facility. As we mentioned on our last call, we do not have any significant bond maturities until 2013, which provides us with a fair amount of balance sheet flexibility. We will continue to evaluate the relative attractiveness of all of our securities as we execute on our shareholder friendly initiatives.

As noted in this morning's press release, the mixed results of the quarter are largely attributable to a softer local economy. In the quarter, the Cincinnati area experienced a 34% sequential quarterly increase in the local unemployment rate, which can be seen on slide 22. The unemployment rate, as of the end of the first quarter was 9%, which is up from 6.7% as of the end of the fourth quarter. Unemployment in our market is now slightly above the national rate.

The speed and magnitude of the worsening economy impacted our first quarter revenue, and the decline was especially pronounced in the first two months of the year. January revenue fell 16% versus the prior month and was the lowest monthly recorded revenue since February of 2007. As the quarter progressed, we saw continued sequential monthly revenue improvement in February and again in March. Slide 23 highlights the impact of this broad contraction and the impact it had on our business in four areas.

In the wireless business, we experienced a significant shortfall in wireless gross activations in the first two months of the year combined with an unexpected $2 million general reduction in wireless usage. As Brian discussed earlier, it was the first time we ever saw a decline in postpaid voice minutes of use.

As a result of lower than expected December through February wireless activations, we rolled out a free handset promotion that targeted higher ARPU customers. This offer, which was introduced in mid February and ran through March, resulted in 55% increase in gross activations compared to January 2009. It helped reduce our wireless inventories by $5 million in the quarter, but also contributed significantly to the $3 million increase in the first quarter subsidy expense.

We also experienced a $2 million increase in bad debt expense, which totaled $6 million in the quarter. Lastly, our first quarter results were also burdened with approximately $3 million of additional pension expense primarily as a result of the deterioration of our pension plan assets in 2008.

We continue to be concerned about the overall impact of the economy on our business and are moving aggressively to reduce expense and maintain our profitability. In addition to the pension and retiree healthcare changes we announced earlier in the year, we will also reduce our headcount by 7%, suspend company contributions to the 401(k) plan for salary and non-represented employees for the remainder of the year and reduce other discretionary expenses. We anticipate our financial results will reflex the impact of these actions in the second half of the year.

As I mentioned, we believe the worst of the economic impact was felt in the beginning months of the quarter. The wireline and postpaid wireless businesses seem to be stabilizing, as our March revenue and churn performance was more closely aligned with our expectations.

The prepaid wireless business has benefited by the challenging economic environment, and we expect it to continue to do well through the remainder of the year. Additionally, the data center business continues to do well, as evidenced by the recent sale of 40% of the new space that was commissioned this quarter which enabled our technology solutions business to deliver a 16% improvement in EBITDA, driven by a significantly more profitable data center revenue in spite of a 37% decline in hardware sales.

We believe these improving revenue trends, along with the additional cost reduction initiatives previously discussed, will enable us to maintain our profitability and are reaffirming the guidance we issued last quarter.

That concludes our comments for the quarter, and I will turn the call back over to Shane.

Shane Brown

Thanks, Gary. This concludes the prepared remarks for today's call. We will now open up the conference to questions. Anthony will give you instructions to participate. Anthony, we are ready for the first question.

Question-and-Answer Session


(Operator instructions). We'll take our first question from Batya Levi at UBS.

Batya Levi - UBS

I wanted to ask you about the cost cutting initiatives you laid out. When do you expect the 7,000 employees to come out of the payroll, and can you give us an idea of how much do you think you can cut by the end of the year?

One question on the prepaid wireless side. It looks like prepaid net adds and ARPU improved nicely. Can you talk about the drivers for that? Do you see a shift from postpaid? What kind of impact have you seen from the unlimited players? Thanks a lot.

Jack Cassidy

I'm sorry, Batya, what was the last part of your question? What kind of impact from what?

Batya Levi - UBS

From the unlimited players?

Jack Cassidy

Well, let me talk about that, and Gary can talk about payroll cuts. Guess what? The unemployment rate is near 10%, and the news is dour every time a consumer turns on a TV or reads a newspaper. Those two factors combined are making people think about the services that they buy and what they pay for. So, yes, I think the economy has caused a shift to prepaid for those people who find that to be more economically reasonable than postpaid.

The uniqueness of Cincinnati Bell i-Wireless prepaid is that we offer multiple price plans. You can buy large buckets or you can pay for it by the drink. Paying for it by the drink on buying a $10 card or $20 card has driven our competitiveness and our favorableness against companies like Cricket or Boost that require you to buy a $50 prepaid monthly plan.

So, we think that as again is evidenced by the growth in that business that the overall macro-environment is shifting former postpaid customers to prepaid. We think that our expense of price plan offerings in our extensive distribution is an advantage over the competitors, means that we've taken a good share of that shift.

So, again, i-Wireless has been in existence now for eight or nine years. It wasn't something that just showed up on the horizon. We have got some loyal users in those groups that get other people in.

Gary, you want to talk about cost cutting initiatives?

Gary Wojtaszek

Sure. [Nancy], to your question with regard to timing, we have started executing on some of the expense saving initiatives in April. We expect to get completed with all the actions through the end of the second quarter, so that the second half of the year's expense run rate will be lower than the first half of the year's run rate.

In terms of the overall expense reductions, what we are looking at is generally getting back to our plan. We basically missed roughly $6 million or $7 million in EBITDA in the quarter. We are taking appropriate actions to cover that miss, plus some other weaknesses that potentially we can see in the year.


We'll take our next question from Frank Louthan at Raymond James.

Frank Louthan - Raymond James

Can you give us an idea with the new data center space, should we expect the equipment sales to start to ramp up pretty nicely? With some of the new marketing and the new handsets and so forth, do you think you're going to see positive net adds in wireless for the second half?

Jack Cassidy

Well, Frank, that constitutes forward-looking statements in terms of positive net adds. It's certainly in our plan to do that. It's the handset. It's the price value relationship, and it's the strength of the network. So, we think that all three of those things are coming together, and we certainly look for an improvement in that space.

I think also having more favorable Nokia handset is going to reduce churn as well. So, gross minus churn equals net. So, if you can knock down your churn and you can increase your gross, then yes, that leads to more net. I really can't speak to how many customers we're going to add on. I can certainly tell you that it's in our plan to do that.

You talked about data center space driving equipment sales, and it's really by customer, Frank. Some customers want to put their own iron into your shop. Other customers want to buy the iron from you. It depends if they are moving from one center to another, if it's brand new space or not. I can assure you that when you have an individual's data center, that means you're going to get equipment sales and you are also going to pull [pipe] as a result, but it really depends on the customer.

Approximately $10 million miss that we had in equipment sales was obviously not caused by a lack of selling data center space. That's more in the enterprise market and in the down market, as capital was tight in the first quarter, CEOs trying to use capital to drive revenue generating activities as opposed to keeping the lights on. So, a lot of those decisions were made.

I think a reasonable question that could be asked is, I see you are not changing your guidance, can you possibly make the guidance numbers? On the top line, we feel that should liquidity find its way back into the marketplace that these equipment sales are not lost forever. This equipment is getting older, routers, hubs, servers, and you have got to replace that equipment. It's not necessarily based on getting a big win from any one customer. It goes across the enterprise zone.

So I think that when liquidity gets back in the market, I think people are going to buy that equipment. So, you have to be poised and ready to do so, which we are. If the liquidity markets don't open up, then certainly we would have to change our topline guidance. Right now, based on discussions with customers, we see it more of being in the funnel, ready to go and more of a capital liquidity question.

Now, when we sell the remaining incremental data center space that we have available, we would expect to drive equipment revenue and profitability as we sell that data center space. Does that answer your question?

Frank Louthan - Raymond James

Yes, that's great. That's what I was getting at. It's helpful. One last question. Looking at the business line changes, if you made an adjustment for businesses that are shifting to void, which then I assume are dropping off the line count, what would that line loss look like? Would it still be negative or cut in half or how would that trend look?

Brian Ross

Frank, I think it's difficult to say, but I can tell you we are adding more VoIP T1s than we are losing in access lines. So, I can't really tell you precisely how many of those VoIP T1s are replacing actually voice lines, but our guess is that it would probably be positive.


We'll take our next question from Daniel Gaviria at Morgan Stanley.

Daniel Gaviria - Morgan Stanley

Good morning. We didn't see you guys reiterating capital outlook? Is there any way you can give us some color on it? Should we use the 1Q cap adjusted run rate or any insight would be helpful?

Gary Wojtaszek

Yes, right now, Daniel, just stay with the guidance that you have.


That will conclude the question-and-answer session today. At this time, Mr. Brown, I'd like to turn the conference back to you for any additional and closing remarks, sir.

Shane Brown

Great, thank you, Anthony. This concludes our call. We'd like to thank everyone for joining us today. You can now hang up.

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