Cincinnati Bell Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 7.13 | About: Cincinnati Bell (CBB)

Cincinnati Bell (NYSE:CBB)

Q3 2013 Earnings Call

November 07, 2013 10:00 am ET

Executives

Joshua T. Duckworth - Vice President of Investor Relations and Controller

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

Leigh R. Fox - Chief Financial Officer

Analysts

Simon Flannery - Morgan Stanley, Research Division

Ana Goshko - BofA Merrill Lynch, Research Division

Batya Levi - UBS Investment Bank, Research Division

David W. Barden - BofA Merrill Lynch, Research Division

Robert Wolfe Medway - Royal Capital Management, LLC

Sergey Dluzhevskiy - Gabelli & Company, Inc.

Jonathan G. Epstein - Deutsche Bank AG, Research Division

Operator

Good morning, everyone. Thank you, all, for holding, and welcome to Cincinnati Bell's Third Quarter 2013 Earnings Call. Your host for today's conference will be Josh Duckworth. [Operator Instructions] Today's call is being recorded.

At this time, I'd like to turn the call over to your host, Josh Duckworth. Mr. Duckworth, your line is now open.

Joshua T. Duckworth

Thank you, and good morning. I'd like to welcome everyone to Cincinnati Bell's third quarter earnings call. With me on the call today is our Chief Executive Officer, Ted Torbeck; and our Chief Financial Officer, Leigh Fox. This morning, Ted will describe for you our third quarter highlights and also provide an update on our strategic investments. Lee will review the third quarter segment results and our financial position. We will then conduct a question-and-answer session.

Before we proceed, let me remind you that our earnings release and financial statements are posted on our Investor Relations website. In addition, you will also find presentation slides for today's call, which we hope you will 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 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 the 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 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 available on our website.

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

Theodore H. Torbeck

Thanks, Josh, and good morning, everyone. Thank you for joining us today to discuss our third quarter earnings. We are very pleased with the financial and operational results in the quarter and the momentum it has created.

As highlighted on Slide 6, our third quarter and year-to-date results are outstanding. Each quarter, the benefits from our investments are becoming more evident in our financial results. In the third quarter, strategic revenue growth surpassed the declines from our legacy copper-based products. Strategic revenues grew by more than 18% compared to the prior year, due in large part to a 36% increase in Fioptics subscribers.

In addition, strong demand for enterprise services resulted in a 9% increase in our strategic fiber and IT-based business products.

The growth in strategic revenue and our continued focus on cost-out initiatives are also having a noticeable effect on adjusted EBITDA. The integration of our business market teams, combined with the project to rightsize our corporate functions has resulted in approximately $3 million of year-to-date savings. And the 2 projects in total are expected to generate more than $10 million in annual operating cost reductions starting next year.

Third quarter adjusted EBITDA totaled $103 million, bringing our total year-to-date to $317 million, after excluding CyrusOne. It is important to note that our adjusted EBITDA for the year includes $7 million of mark-to-market gains associated with our compensation plans. As such, on a normalized basis, our year-to-year -- year-to-date, adjusted EBITDA totaled $310 million. Given the strong quarter and year-to-date results, we are very pleased to raise our full-year adjusted EBITDA guidance, inclusive of mark-to-market, to a range of between $400 million and $410 million.

In addition to our operational achievements for the quarter, I would also highlight the successful refinancing of one of our higher-coupon senior notes with a more economical term loan. We expect this refinancing will reduce interest payments by approximately $20 million in 2014 and provide increased flexibility for achieving our operational and financial goals next year.

Now turning to Slide 7. I would like to illustrate how the success of our strategic investments is changing the face of this company. As stated in the past, our objective is to create a fiber-based company with growing revenues, growing profits and significant sustainable free cash flows. One of the key milestones in our strategy is to report year-over-year Wireline revenue growth for fiscal year 2014. Progress toward this goal is clearly evident. In the third quarter, revenue growth from our strategic products more than offset the legacy decline.

Strategic revenue totaled $93 million for the quarter, which is up 18% compared to the prior year. Third quarter revenue from Integration services totaled $59 million, which is up 12% from the third quarter of 2012. This category of products is made up of lower margin hardware sales and services and can be cyclical in nature. But with that said, these sales require little to no capital, and are an important value-added product to our existing customer base.

Slide 8 demonstrates the impact of our fiber investments are having on our consumer market. Revenue from Fioptics was $26 million in the quarter, which is up 48% over the prior year. As we have highlighted, the growth in Fioptics has more than offset the decline from our Legacy consumer products, with total consumer revenue growing 2% compared to the prior year. These results are powerful and confirm that we have started to change the trajectory of our business.

We are now able to provide Fioptics to 258,000 homes and businesses and remain on target to achieve our goal of providing Fioptics to 35% of Greater Cincinnati by the end of the year.

In addition to the direct benefits we're receiving from Fioptics, the buildout of our fiber network also allows us to improve data speeds for our copper-based products in areas around the Fioptics deployment. We are currently able to provide at least 10 meg of speed to approximately 400,000 homes, which is up from 315,000 a year ago. As a result, our high-speed Internet subscribers are up 6,000 from the prior year, as we ended the quarter with 266,000 high-speed Internet subs.

Now turning to Slide 9. Our operating results for the Fioptics suite of products demonstrates that we clearly offer a compelling alternative to cable and satellite TV and Internet services. In the quarter, we added a record high 6,500 Fioptics entertainment and a record 7,500 Fioptics high-speed Internet subscribers. We finished the quarter with 70,000 entertainment subscribers and 74,000 Fioptics high-speed Internet subscribers, both of which are up more than 35% compared to last year.

Total penetration remained high at 29%, similar to our second quarter results. And we continue to see significant improvements at our ARPU once neighborhoods are mature and promotional rates have expired.

Our aggregate consumer household ARPU for the quarter was $139, up 6% over the prior year. More importantly, ARPU for customers that have rolled off promotional pricing was $157 in the third quarter of 2013, which is up 7% from a year ago.

Our third quarter churn in single-family neighborhoods was 2.3%, while churn for apartments was 6.6%. Churn numbers were slightly elevated compared to prior year, as the improved housing market resulted in an increased number of our customers changing their primary residence.

Turning now to Slide 10. Our Business and Carrier markets also continued to perform well and generated $65 million of strategic revenue in the quarter, which is an increase of 9% from last year. This was largely driven by growth of 10%, or $2 million from our high-speed data and cell site backhaul services. Growth of 16%, or $2 million from our managed voIP products and 3% or $1 million growth from our IT Managed and Professional Services. As seen in the results, the integration of our Wireline business group and IT Services business provides an attractive solution for our customer. We now provide an end-to-end IT and network solution with one trusted partner, whose breadth and scale of fiber and IT assets in the market far exceed our closest competitor.

In 2013, we have lit an additional 60 multitenant units with fiber, bringing our total MTUs to 475. Excluding Wireless towers, we have 4,100 buildings lit with fiber, more than 5x our closest competitor. We also have 450 towers lit with fiber and provide service to more than 70% of the approximate 1,100 towers in our market. We have 5,500 fiber route miles in Greater Cincinnati alone. And we have redundant points of presence in Columbus, Louisville and Indianapolis, connected through fully diverse 10 gig, Fiber Optic pass, which is important when selling to midmarket business customers.

Though the future of the company continues to look bright, I would like to again echo comments from previous calls. All of our consumer and business investments are success based. And we will continue to monitor the key metrics and costs, especially around the deployment of fiber.

With that said, we are very excited about our quarter and year-to-date results and are confident we are on track to achieve our milestones of Wireline revenue growth and positive free cash flow in 2014.

My comments thus far have focused on our growing strategic revenues and the underlying assets. There are 2 additional key components to the strategy, which I would also like to highlight: Our Wireless business and our investment in CyrusOne.

Our Wireless segment generated adjusted EBITDA of $14 million this quarter and we continue to manage the business for cash flow and profitability. As mentioned in the past, we are exploring strategic options for this business, but have no update at this time.

Last evening, CyrusOne reported another strong quarter, as the team continues to execute on their strategy. Our lockup for selling any portion of our investment in CyrusOne ends in January 2014 with the required filing of a registration statement due in March of 2014. We take our role as the largest shareholder of CyrusOne very seriously and continue to look at all our options with respect to responsibly monetizing this investment.

As such, we remain focused on maximizing our return and believe that we have enough financial and operating flexibility within Cincinnati Bell to meet this objective and to generate free cash flow.

Now before I turn things over to Leigh to provide you with a review of the segment and financial position, I would like to congratulate him on his promotion to CFO. Lee has been with Cincinnati Bell since 2001 and has served in multiple capacities within the organization. Before joining the corporate group in 2011 as the Senior Vice President of Finance, Leigh was the Chief Financial Officer of CBTS, our subsidiary that pioneered the growth of our data centers. Leigh brings a wealth of financial and operational experience in both the telecommunications and technology space. And I am confident that he will succeed in this new role.

On that note, I would like to call the call over to our CFO, Leigh Fox.

Leigh R. Fox

Thanks, Ted. Thanks for the kind words. My comments today will focus on the consolidated statement results for the quarter, our financial position and an update of consolidated free cash flow.

Before I begin, I want to share my investment thesis for Cincinnati Bell and thoughts regarding the assets to be used for creating shareholder value. First, Cincinnati Bell's high density, urban concentration and single-market consumer focus, provides us the opportunity to address customer demand for entertainment and faster data speeds on a more cost-effective basis than some of our peers. We believe that we will be able to substantially overbuild the city with a long-term fiber asset, while achieving returns of approximately 20%.

Second, the integration of our business markets teams has created additional path to growth. The integration permits us to offer end-to-end services, beginning with our fiber network and extending through the management of our application layer. This end-to-end, one trusted partner approach is becoming increasingly critical to our customers' operations.

Third, with CyrusOne, we have an investment that has the ability to reduce our companies leverage to between 2x and 3x. In order to achieve this, we will focus on monetization, timing and strategies, that we believe secure the greatest value to our shareholders.

Fourth, our Wireless business is currently generating solid cash flows and earns the right to highly valuable spectrum assets. Through management of these assets, our business plan transforms Cincinnati Bell into a company with a solid balance sheet, a company with strategic services that will drive steady revenue and profit growth, and a company with significant sustainable free cash flow.

Now turning to Slide 12. I would like to begin reviewing our consolidated results for the quarter. Total revenue of $311 million was relatively flat compared to the prior year, after excluding the results of CyrusOne. Total adjusted EBITDA for the quarter was $103 million, up $3 million after excluding CyrusOne's results. The increased adjusted EBITDA was primarily as a result of favorable mark-to-market fluctuations on certain compensation plans indexed to our stock price. This was partially offset by a $7 million decline in Wireless adjusted EBITDA. Net income for the quarter was $9 million, up from $4 million a year ago.

Turning to Slide 13. Our Wireline revenue for the quarter was $181 million compared to the $182 million reported in the third quarter of 2012. Wireline's strategic revenue totaled $66 million for the quarter, up 24% from the prior year.

Adjusted EBITDA for the quarter was $83 million, compared to $84 million of the prior year. As a result, Wireline adjusted EBITDA margin was 45%, down slightly from a year ago as the loss of higher-margin access lines continues to pressure margins.

Now moving to Slide 14. Wireless revenues declined by 17% to $49 million for the quarter compared to the prior year. This was driven largely by the continued loss of postpaid subscribers. In addition, prepaid ARPU was down 10%, as a result of our increased number of Lifeline subscribers, who typically select lower-price rate plans. The impact of these decreases was partially offset by a 14% year-over-year improvement in postpaid data ARPU, as smartphone penetration increased to 45%.

Postpaid churn was 2.6% in the quarter compared to 2.4% in the third quarter of 2012.

Now turning to Slide 15. Our IT Services and Hardware segment revenue for the quarter was $88 million, an increase of 12% compared to 2012. This was driven largely by a 14% growth in Hardware sales and a 9% increase in revenue from Managed and Professional Services. Adjusted EBITDA was $7 million in the quarter resulting in adjusted EBITDA margin of 8%, which is comparable to the third quarter of 2012.

Turning to our investment in CyrusOne on Slide 16. Last evening, the CyrusOne team reported 19% year-over-year growth and top line revenue as well as 21% growth in adjusted EBITDA for the third quarter. The CyrusOne team confirmed that it is largely on target to achieve its 2013 full year revenue guidance range of between $260 million and $265 million, and the range of -- for adjusted EBITDA guidance of $133 million to $137 million.

Cincinnati Bell ended the quarter with $2.2 billion of net debt that results in a leverage ratio of 5.4x in 2013 revised EBITDA guidance. However, if net debt is reduced for the market value of our investment in CyrusOne, the adjusted leverage ratio would be 3.4x.

As a reminder, the tax basis on our CyrusOne investment is $600 million, and we have $1 billion of NOL of the shelter tax gains on the CyrusOne monetization.

Turning to Slide 17. We provide details for our free cash flow in the quarter. In addition to EBITDA, free cash flow was impacted by interest payments totaling $30 million, capital expenditures of $46 million, pension and OPEB payments of $34 million, cash dividends of the $7 million received from CyrusOne and other working capital items.

As Ted mentioned earlier, during the quarter, we successfully closed on a new $540 million tranche B term loan. The proceeds from this loan were used in October to redeem the $500 million, 8.25% senior notes previously due in 2017. The new term loan is due in 2020 and bears interest at LIBOR plus 3% including a 1% LIBOR floor. Based on current rates, we expect to save approximately $20 million in interest costs in 2014.

Our analysis of third quarter and year-to-date capital expenditures is included in Slide 18. Year-to-date, we have spent $58 million on Fioptics and $20 million on strategic business growth products. Investments in these products generated high returns and we are very encouraged by the positive customer response. It is our expectation that these investments are the cornerstones for our Wireline growth in 2014 and beyond.

Turning to Slide 19. We provide our full-year 2013 guidance. We are very pleased with the company's strong performance in the quarter and year-to-date and are confident that the fourth quarter will cap off what has been a successful and transformational year. Accordingly, we have increased the company's 2013 adjusted EBITDA into a range of between $400 million and $410 million, up from $390 million to reflect the outstanding year-to-date results and expectations for the remainder of the year.

Before we begin the Q&A section, I would like to personally express how much I've enjoyed interacting with our investors and analysts over the past month. I look forward to meeting and speaking with many more of you in person in the coming months.

This concludes the prepared remarks for today's call. We will now open the conference up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley, Research Division

First on Wireless. I think you said there was no update there. Assuming there's no transaction, how do you think about running that business? Obviously, you've done a great job controlling the costs and keeping margins up. But at some point, it's going to get the point where it's just not going to be feasible to continue from a sort of cash flow point of view. So are you thinking about sort of winding down strategies or other sort of endgame scenarios if you don't sell it at a price you want? And then on the DSL side of things, we heard Time Warner say that -- Time Warner Cable say that they were aggressively targeting DSL customers -- obviously, Fioptics is rolling out quickly, but there's still a lot of DSL out there. How do you see the competitive balance between you and the cable companies in your non-Fioptics areas?

Theodore H. Torbeck

Thanks, Simon. First of all, on the Wireless -- first of all, the team has done a fabulous job in managing for cash in this business. We think that we can continue to do that. And as long as -- we still have a good market. We have 355,000 customers. We have a good network in Cincinnati. And we'll continue to manage it for cash flow and take costs down. As we lose subscribers, we're going to have to take the appropriate costs down and that's what we plan to do. So we don't have a crystal ball to know the end date, but we, clearly are going to manage it for cash going forward. And at the same time, we're going to continue discussions. And at this time, we don't have anything to report, but we will continue those discussions.

Simon Flannery - Morgan Stanley, Research Division

And on DSL?

Theodore H. Torbeck

On the DSL question, we've been very successful. We've run fiber to the node and copper to the home. And it's significantly helped in the speeds that we have. We're -- cable runs somewhere around 30 to 50 meg, but their average is probably somewhere around 10 meg. And we think with the upgrades that we've done with DSL and with fiber, we can compete. And that's what we've been able to do. And where we've put fiber to the home, we actually get a better product where we can run up to 100 meg.

Simon Flannery - Morgan Stanley, Research Division

And is there any ability to accelerate the Fioptics rollout?

Theodore H. Torbeck

Right now, we don't see increasing -- we may increase the amount of fiber, but we don't see spending additional capital than what we have initially talked about.

Operator

And we'll take our next question from Anna Goshko from Bank of America.

Ana Goshko - BofA Merrill Lynch, Research Division

I have 2 questions. The first one, it appears there are some negative press locally in Cincinnati at the end of October from some Fioptics outages that kind of hit my news screens. And difficult to tell what the extent or the root of that issue was, but wondering if you could just sort of put that in perspective and let us know if there is any kind of customer credits or anything related to calming subscribers down that we may see impacting the fourth quarter results.

Theodore H. Torbeck

Yes, we did have an outage. It was -- it lasted about a day. 24 hours, totally. We got about 60% of the customers back up within a couple of hours. But it took a little while to get the remainder. We are offering our customers a credit, actually a gift card of $25. And that's already been put in place and accounted in these numbers. This is a complex system, just like any other. And you're going to have situations like this. It's how you respond to them, and how you respond to your customers. I think we've done the right thing.

Ana Goshko - BofA Merrill Lynch, Research Division

Okay, so it's something that you feel was contained and you're on top of?

Theodore H. Torbeck

Absolutely. And I guarantee, we're going to be better because of it. So we've learned a lot and we put things in place to improve. And our customers will see a better supplier because of it.

Ana Goshko - BofA Merrill Lynch, Research Division

Okay, great. And then just on the cash flow for the year. Just on the cash burn, it does seem that working capital has been a use of cash, year-to-date. I'm wondering how you think that's going to trend in the fourth quarter?

Leigh R. Fox

I think it's -- Hi Anna, this is Leigh. I think it's going to be consistent. I think you know we -- we're not changing anything with respect to cash flow guidance. And obviously working capital changes a bit from quarter-to-quarter, but we feel like our forecasts are going to remain pretty consistent.

Ana Goshko - BofA Merrill Lynch, Research Division

Okay, so that would mean that we should see more of a positive impact from working capital change on the cash -- on the actual cash burn in the fourth quarter?

Theodore H. Torbeck

No. There should be a slight decrease in...

Ana Goshko - BofA Merrill Lynch, Research Division

Slight use? Okay.

Leigh R. Fox

Yes, slight use of cash in the fourth quarter.

Operator

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

Batya Levi - UBS Investment Bank, Research Division

I think on the call side, you mentioned that there was a $10 million cost reduction initiative for next year. Can you elaborate a little bit more on that? And on Fioptics, can you talk a little bit about the profitability of the business that adds in revenues have been better than expected? You mentioned that churn picked up a bit in apartments, but I think you have initiatives to bring that down. How do you think this business will impact overall, Wireline margins, going forward?

Theodore H. Torbeck

Okay, on the cost out. It's not one thing. We have a number of initiatives to take cost out. We put a lot of focus this year on our corporate costs and we've been very successful in taking a significant amount of cost out. We still have lean running in operations. And there's a lot of projects being worked that get out our costs and trying to reduce it. So the other thing that we've been talking about is the integration between the CBTS and the CBT market -- business markets group. And we've realized about $1.5 million to $2 million there this year. I think there are still opportunities. We've got a whole host of projects that are lined up, that we need to have system changes, that enable us to take cost out. So there's a lot of opportunity there that we're still exploring and still exercising to take the number up. So that's the cost out.

Batya Levi - UBS Investment Bank, Research Division

The other was on the Fioptics profitability.

Leigh R. Fox

So hi, this is Leigh. On Fioptics profitability, it's obviously -- as you are increasing the scale of the business, you'll see its gradual steady movements and profitability issues kind of stabilize the volumes and we're sort of in obviously growth phase. But overall, I think over time, we see the profitability of that business being around the kind of mid-40% range. So you will -- we've been very upfront about the fact that we do expect some compression in the Wireline margins over time due to the migration of the decline from the Legacy products and the increase in our strategic products.

Operator

[Operator Instructions] We'll go next to David Barden, Bank of America.

David W. Barden - BofA Merrill Lynch, Research Division

I just wanted to follow-up, first on CyrusOne again. Just as a hypothetical -- I know you guys kind of talked about the pacing of, maybe shorter-term monetization versus -- at higher prices or longer-term monetization in terms of making the longer term bet. Could you rule in or rule out whether a full on sale of the business is on the table, or whether you've been approached to kind of have those kinds of discussions? That would be the first question.

Theodore H. Torbeck

Yes. First of all, we have a lot of assets in this business. And for the right price, they are for sale. But we have no -- right now, I have no intention of -- or in no discussions to sell the whole CyrusOne as one piece. So our plan is we remain extremely bullish on CyrusOne. I think last night's statements from them show that they're executing well. And we think over time that, that asset will grow in value. We're going to do the right thing for the shareholders, that's our primary focus. And over time, we'll monetize that asset at the appropriate levels.

David W. Barden - BofA Merrill Lynch, Research Division

Perfect. And then I guess just my second question, Leigh. Now that you've been kind of in the seat for a little while, we've been talking a little about some of the initiatives that were announced or undertaken at the beginning of the year and how they've kind of been executed on. Do you see kind of -- at this moment in time, kind of low-hanging fruit that we'll be talking about at the fourth quarter and into 2014 for next year? And if you do, kind of where do you think -- where are you focused on to try to bring your value add to the organization at the margin?

Leigh R. Fox

David, I think the term low-hanging fruit, that's a hard one to hear. I think we've done such a great job over time that things do become progressively harder. We're focusing, as Ted mentioned, right now on our corporate costs and making sure that our corporate costs are appropriate. And we really think that -- we think of that in terms of short, mid and long term. I think most of the short term is kind of what you're hearing us quote. What we've -- I think we've addressed a lot of the short-term. In the midterm, you're really talking about process improvements and in the kind of mid-to long-term, you're talking more system related. So I think we're focused on the right things, but I can't picture any kind of substantial cost out or efficiency initiatives that we'd be undertaking that we're not already looking at. With respect to, my focus -- really my focus is in the short-term, simplifying the story. I think we have a very exciting story. I think, as it relates to how we sit within our peers, I think we've got a lot of opportunities. I think it's complex and I think it's my job to get out in front of you guys and our investors and really simplify this in a way that shows where we're investing and how those investments are making an impact. And I think that's kind of goal #1 for me.

Operator

And we'll take our next question from Rob Medway with Royal.

Robert Wolfe Medway - Royal Capital Management, LLC

I just wanted you to clarify your response to David's question that you just answered. You're obviously not in discussions to sell all of CyrusOne now, and that's clear and that's fine. But if -- would you do whatever is in the best interests of shareholders if you were approached for a complete sale, if everything on the table to enhance value for shareholders? I just wasn't clear on your response.

Theodore H. Torbeck

Well I mean, first of all, Gary has got to make that call. I mean it's his -- it would be his decision, whether we sell or not, so that's who would have to make the decision, Gary and his board.

Robert Wolfe Medway - Royal Capital Management, LLC

It would really be his Board, correct?

Theodore H. Torbeck

Yes. His Board. Yes.

Operator

And we'll take our next question from Sergey Dluzhevskiy from Gabelli & Company.

Sergey Dluzhevskiy - Gabelli & Company, Inc.

Could you update us on your M&A for lots of kind of -- what was the remain criteria of your thinking about M&A? Obviously we have a strong position in metro fiber in Cincinnati, but what are some of the areas that you can potentially look at, may be, acquiring in order to accelerate gross whether it's metro fiber in adjacent areas, some Cloud applications?

Leigh R. Fox

Hey, Sergey, this is Leigh. To answer your question, I think right now, obviously, we look at a lot of different options for the business. But we're solely focused on, really, the strategy we've got in front of us, which is, we've got to strengthen our balance sheet. And we feel like we've got enough organic assets here that we can invest in that will turn the trajectory of this business, that we can begin looking at options possibly over time. But to be honest, we're really solely focused on turning the trajectory of the business and really meeting the short and midterm milestones.

Operator

We'll take our next question from Jonathan Epstein with Deutsche Bank.

Jonathan G. Epstein - Deutsche Bank AG, Research Division

I just wanted to go back to the question of Fioptics churn, which ticked up sequentially in both categories of homes. And as you said, a lot of that is customers coming off promotional pricing. So how do you mitigate that churn over the next few quarters as you continue to bring on new customers on promotional rates?

Theodore H. Torbeck

Well, we think that the quarter we just came out of is the heavy move season, and that's what generated the blip up. We expect that the single-family unit churn rate will drop close to 2%. By the way, that's the number we need to achieve in our financial returns for Fioptics. So we're pretty confident that, that's where we'll be. And MTUs are, again, it's heavy move in the third quarter and we expect that to normalize in this quarter.

Operator

And that does conclude our question-and-answer session. At this time, I'd like to turn the call back to you, Mr. Duckworth, for any additional or closing remarks.

Joshua T. Duckworth

Thank you. This concludes our call for today. We would like to thank everyone for joining us.

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