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Cincinnati Bell (NYSE:CBB)

Q1 2014 Earnings Call

May 08, 2014 10:00 am ET

Executives

Joshua T. Duckworth - Chief Accounting Officer, Vice President of Investor Relations and Controller

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

Leigh R. Fox - Chief Financial Officer

David L. Heimbach - Chief Operating Officer

Analysts

Simon Flannery - Morgan Stanley, Research Division

Batya Levi - UBS Investment Bank, Research Division

Barry McCarver - Stephens Inc., Research Division

Alexander Sklar

Stanley Martinez - Legal & General Investment Management America Inc.

Ana Goshko - BofA Merrill Lynch, Research Division

Sergey Dluzhevskiy - G. Research, Inc.

Arun Seshadri - Crédit Suisse AG, Research Division

Operator

Good morning, everyone, and thank you for holding. And welcome to the Cincinnati Bell First Quarter 2014 Earnings Release Call. [Operator Instructions] Today's call is being recorded. At this time, I would now like to turn the call over to your host, Mr. Josh Duckworth. Please go ahead, sir.

Joshua T. Duckworth

Thank you and good morning. I'd like to welcome everyone to Cincinnati Bell's First 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 provide an update on our strategic initiatives and discuss the recent announcement regarding the sale of our wireless spectrum.

Leigh will then provide a financial overview and the discussion of our quarterly segment results. 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 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 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. We have had a tremendous start to the year. We're excited to report great operational results, which have culminated in year-over-year growth for both wireline revenue and adjusted EBITDA for the first time in a decade. We also achieved a key company milestone with the sale of our wireless spectrum. It's been a very busy quarter for us, and we remain as focused and confident as ever on our ability to execute on our plans.

On Slide 6, we have highlighted the 3 key strategies for 2014, which are critical to transforming Cincinnati Bell into a fiber-based entertainment, communications and IT solutions company with growing revenue, growing profits and significant cash flows. We will continue to invest in high demand Fioptics, business fiber and IT solutions. We will manage our wireless business for cash as we work through the closing and eventual wind-down of the business. And we will continue to evaluate all opportunities to monetize our CyrusOne investment.

Now turning to Slide 7. Our strategic investments continue to drive strong growth across all segments within our strategic product mix. Compared to the first quarter of 2013, wireline strategic consumer revenue is up 45%, as total Fioptics quarterly revenue exceeded $30 million. Wireline strategic business revenue is up 14% on the strong demand for Metro Ethernet and VoIP products. Managed and professional services revenue is up 22% as demand from enterprise customers remains strong.

We could not be more pleased with these first quarter results. The strategic investments we are making in fiber have dramatically reshaped the outlook for Cincinnati Bell. We are now a company with growing wireline business that provides our residential customers a superior video and high-speed Internet experience and our business customers with access to our premier IT and communication solutions. We are bullish on our future and confident in the superior quality and long-term relevance of our fiber assets and the returns we will generate.

Turning to Slide 8. I would like to further discuss the exciting news related to our wireless business. Several weeks ago, we announced that we are selling our spectrum licenses and certain other assets to Verizon in a transaction valued at $210 million.

In addition, effective with the close of the deal, we will begin offering Verizon wireless products in our Fioptics retail locations while also enhancing our existing wireline relationships with Verizon. Throughout the process, interest in these assets remained high, and we were approached by multiple parties. As interest heightened, we evaluated all our options and ultimately pursued the strategy which we determined generates the most value for our shareholders.

Our wireless team has done an amazing job managing this business over the past several years. And we will continue these efforts as we operate this business for the next several months. When the deal closes, we will notify our customers of our intent to no longer offer wireless service. And we expect churn to increase significantly.

In the interim, we have communicated with our customer base that there is no need for immediate action, and customer churn has only increased slightly since the announcement. As such, we see no reason for updating our wireless adjusted EBITDA expectations for 2014 at this time. Let me remind you that this deal is subject to customary closing conditions, including approval by the FCC. That said, we do not expect any associated regulatory issues, and we believe the transaction will close in the second half of this year.

We are actively working through detailed plans associated with shutting down the business and decommissioning the network. As you can imagine, this is an extremely complex arrangement, with both onetime and recurring expense leakage items that require specific mitigation and vendor solutions. We have developed an initial post-close operating plan, but are not currently prepared to provide any specific updates at this time. We have a tremendous amount of work ahead of us and remain excited about the transaction as it is a key milestone that provides us the ability to narrow our focus on growing our strategic products. We will actively update you throughout this process.

The final component of our strategy is the successful monetization of our investment in CyrusOne. The CyrusOne team continues to deliver strong results and we continue to be a patient investor. Subsequent to our last earnings call, the registration statement filed by CyrusOne became effective and we are no longer restricted in the volume of shares we are permitted to sell. However, nothing related to our monetization strategy has changed. We are still committed to executing a well-timed and thoughtfully coordinated modernization plan. Our goal for this investment is to maximize shareholder value by balancing the long-term upside in CyrusOne with the capital needs of our growing fiber business.

I would like to now turn the call over to Leigh to summarize our quarterly results in more detail.

Leigh R. Fox

Thanks, Ted, and good morning, everyone. Our results for the first quarter are outstanding. And the sale of our wireless spectrum achieves one of our key business objectives and puts us one step closer to our goal of creating a growing fiber-based company with a healthy balance sheet.

Consolidated first quarter results are presented on Slide 10. Revenue for the quarter totaled $323 million, up 4% from the prior year, as increased demand for our strategic products and strong hardware sales more than offset legacy and wireless declines. Adjusted EBITDA totaled $106 million, up $1 million, after excluding mark-to-market gains on compensation plans indexed to the change in our stock price. First quarter net income of $7 million produced earnings per share of $0.02.

Moving to our quarterly segment results, starting on Slide 11. Wireline revenue totaled $184 million, up $4 million from the prior year, highlighting increased consumer and enterprise demand for fiber-based products. Wireline strategic revenue was up 26%, compared to the prior year and now account for more than -- or approximately 40% of all wireline revenue. Wireline adjusted EBITDA for the quarter was $85 million, up $1 million from the first quarter of 2013 as margins held steady at 46%.

Slide 12 illustrates the continued success of Fioptics and the positive impact it is having on our consumer market. Revenue from the consumer market totaled $76 million and has increased each of the past 9 quarters. Fioptics consumer revenue totaled $29 million in the quarter, up 45% from the prior year.

As of the end of the first quarter, we were able to deliver at least 10 megs of speed to more than 440,000 addresses and 38% of our customers subscribed at this speed or higher.

As noted on Slide 13, Fioptics' penetration rate and churn remained consistent year-over-year as the product is now available to 288,000 addresses. At the end of the quarter, we had 92,000 Fioptics Internet and 78,000 video subscribers, both of which were up more than 30% compared to the prior year. Fioptics ARPU byproduct was up more than -- up on average 4% compared to the year -- a year ago as video ARPU totaled $74 and Internet ARPU totaled $36 during the quarter. Revenue growth on our wireline business total -- market totaled 14% as highlighted on the next slide. Similar to the success in this consumer market, strategic revenue growth for business customers also more than offset legacy declines due to the continued demand for faster speed.

The first quarter wireline results were outstanding, and for the first time in more than a decade, we generated year-over-year wireline revenue and adjusted EBITDA growth. A key milestone for us this year is to grow full year wireline revenue, and we believe these results provide a strong foundation towards achieving that goal.

Turning to Slide 15. Our IT services and hardware segment turned in an equally impressive quarter. Revenue for the quarter was $102 million, up $17 million over the prior year due to strong hardware sales and increased demand for our virtual data center and staff augmentation services.

Strategic managed and professional services revenue totaled $33 million, up $6 million year-over-year, and resulted in an improved adjusted EBITDA margin. Adjusted EBITDA was $8 million for the quarter, up from $4 million a year ago.

Our wireless result is presented on Slide 16. Wireless revenue of $45 million for the quarter declined by 16% compared to the prior year, driven largely by 22% decline in postpaid subscribers. Adjusted EBITDA for the quarter was $18 million, down $2 million compared to the prior year, and consistent with the projected EBITDA declines in this segment.

Slide 17 details our first quarter cash flow results, which are in line with expectations. For the quarter, free cash flows were $9 million and were impacted by interest payments totaling $36 million and capital expenditures of $34 million.

Additional detail on the first quarter capital expenditures are on Slide 18. During the quarter, we invested $11 million on Fioptics, passing 12,000 addresses. For the full year, we remain targeted to invest -- on target to invest $75 million to $80 million in Fioptics and pass 62,000 addresses with this suite of products.

In addition, we also invested $9 million in other fiber-based business build and managed service projects, which bring measurable deal-driven returns. During the quarter, we spent $8 million on maintenance and $6 million in our wireless segment. The timing of software upgrades drove the quarterly wireless capital expenditures, and we expect future spend will be limited as we start to wind down the operations. Positive free cash flow for the quarter is consistent with expectations and puts us on track to be free cash flow neutral to positive in 2014.

As the year progresses, we will continue to actively monitor our cash forecast, particularly as it relates to the wind-down of wireless operations, as we expect this to put increased pressure on cash in the year. We also recently announced a large IT outsourcing initiative, which will also put pressure on cash.

The transition of responsibility for this outsourcing initiative is expected to occur over the next 4 to 6 months, during which time we expect to be impacted by cost overlaps and onetime transaction fees associated with the transition.

However, starting in 2015, we expect significant benefits that not only reduce cost, but also ultimately create a more efficient IT function and provides increased opportunity for us to focus on our expanding fiber network. When operational transition normalizes, we expect to generate ongoing annual savings of approximately $5 million from this transition.

In closing, we're off to a great start. Our strategic -- our strategy is simple. Invest in our strategic products and maximize cash flows from our wireless and -- from wireless and our investment in CyrusOne. We are confident that the successful execution of our plan will create a healthy company, focused on increasing shareholder value.

This concludes the prepared remarks for today's call. Thanks for listening. We'll now turn the conference over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Simon Flannery of Morgan Stanley.

Simon Flannery - Morgan Stanley, Research Division

So looking at the Fioptics numbers. It's seeming like your Internet momentum is really accelerating versus your video momentum, 79% more activations this quarter. Is that because you're selling into businesses or is that over the top [indiscernible] taking broadband over? And if that's the case, I'm looking at your Internet ARPU, $36 for a fiber product, seems like there's some room for more monetization there. And then, over on wireless, what are you going to do Q2, Q3 in terms of marketing? Are you really going to pull back on advertising and trying to add new customers so subsidies and so forth go away, or is it pretty much business as usual into the close?

Theodore H. Torbeck

Thanks for the question, Simon. First on the wireless. Yes, we will be pulling back on advertising. We will be pulling back on anything that we can save the money on. We're not going to be actively pursuing new customers, basically focused on keeping the customers that we have. Again, we haven't closed yet, so we still got a very strong business that we're operating like we have the last few years.

Leigh R. Fox

Can I answer the...

Theodore H. Torbeck

Yes.

Leigh R. Fox

Yes, Simon, this is Leigh. On the Internet question versus video. With the increased adoption of higher speeds, that was actually, I think more related to just the upgrades in our network, and our customer base, the demand for the increased speed. We're not really seeing any impact per se on over the top. Our video adoption rates are in line with expectations. And actually, we did expect the increased adoption in Internet, and we believe internally that it's really driven on the upgrade of the network.

Simon Flannery - Morgan Stanley, Research Division

And on Internet ARPU, so we've heard a couple of companies this quarter talking about taking some price there. Do you have an opportunity?

Leigh R. Fox

Yes. Look, we do believe there's room for growth there.

Operator

And next we have Batya Levi of UBS.

Batya Levi - UBS Investment Bank, Research Division

Couple of questions. First, can you talk a little bit more about the strength in IT hardware sales you saw in the quarter. Were there any onetime pull-forward impact there or is there any good reach-through [ph] for potential connectivity services that could come along with the sale in the first quarter? And second question on you -- on Verizon. I think you mentioned that this transaction will enhance your wireline relationship with them. Can you elaborate a little bit more on that and what could the opportunity be? And lastly, on CONE, maybe just to provide your view on how you're going to approach the monetization of this asset? Do you -- you have mentioned that you want to participate in the long-term upside in the asset. Strategically does that mean that you would potentially wait to do one -- a transaction in one swoop or are there any reasons that we should think about that you might want to do it in different increments?

Theodore H. Torbeck

Thanks, Batya. On the IT hardware sales, this is really our first front into customers that we use to establish a relationship. So some of the sales improvement you're seeing is from the mid-market, as we've described in the past. We're starting to sell down market the CBTS sales. But also, clearly, some of the largest customers we have, have increased their buy. It is cyclical. It does go up -- up and down over quarters. And we had a good -- very strong quarter, but we have large companies making large purchases. It does also give us the opportunity to sell additional products to them. And we use the hardware sales as an entry-level to get in there, establish a relationship and then further drive growth. On the Verizon question, enhanced relationship. As part of the deal, we were able to negotiate 88 cell towers that we're going to do backhaul on, that it was previously awarded to a competitor that we were able to win as part of that deal. We were also given an RFP for backhaul on some small cells that we're currently evaluating to submit our response to. So it has increased our working relationship with Verizon.

Batya Levi - UBS Investment Bank, Research Division

When was the -- just follow-up on the wireless backhaul, when do you think that will start to ramp?

Theodore H. Torbeck

Well, the 88 cell towers are already working. We've already started. On the small cells, again, we got to get the RFP in, and then there's going to be a selection process, and we'll go from there. On your CONE question, we still remain extremely bullish on CyrusOne. As you can see the results last night, they were fantastic, 29% revenue growth, 32% growth in EBITDA, but at the same, we remain a patient investor. I would not sell at the current prices. I would not sell at the current prices. And so we do think that with their performance, it's -- there's still a lot of value that is continued to be put into that business, and Gary and his team are executing very well. Fully to -- I think your point was, would you sell all of it in the market at one time? We absolutely would not. That is -- there's just too much volume to be handled at one time in the market. If we get the targeted price that we think we deserve and where we think the value is, we would sell down over time. But again, it's going to be, as Lou -- as Leigh said in the -- in his words, it's going to be very coordinated and thoughtfully executed to plan, and it's to maximize shareholder return.

Operator

Next we'll move to Barry McCarver of Stephens Inc.

Barry McCarver - Stephens Inc., Research Division

Leigh, you mentioned a large IT outsourcing initiative in your prepared remarks. Can you expand on what that is exactly a little bit?

Leigh R. Fox

Yes, Barry. We've taken a pretty hard look over the last 12 months at everything the organization -- as we, obviously, continue to do in every area. And IT was one that we felt like we had a good opportunity to effectively take a pretty large fixed infrastructure and begin to modernize it. And outsourcing, obviously, is something that is a normal occurrence in most every industry, so we felt like it was a very good option for the business. As you can imagine, the typical functions are -- we're aligned with the typical functions you would hear in any outsourcing. So a lot of the strategy and a lot of the very important decisions remain with Cincinnati Bell and a lot of the things that make sense, like some of the testing and dev work, they won't remain with Cincinnati Bell. So we're -- it was a hard decision for us. Obviously, when you impact folks, you take a while and you make that a very thoughtful decision. But I think, overall, it'll have a very positive impact on the company moving forward.

Barry McCarver - Stephens Inc., Research Division

Okay. And kind of the timing of when you start to implement this?

Leigh R. Fox

Implementation will actually begin within the next several weeks. And as I mentioned, it should take -- we expect 4 to 6 months to transition. I mean, it's a fairly large deal, and then, we should start seeing the annualized savings come in into '15, and then, probably a more normalized view into '16.

Barry McCarver - Stephens Inc., Research Division

Okay. And on the CapEx for the year, a little bit lighter quarter. Do you think the CapEx trends will be a little bit more evenly spread out through the year or is that going to be loaded more heavily into the middle part of the year?

Leigh R. Fox

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You'll probably see it a little more heavily loaded in the middle part of the year. I think, the polar vortex, I think, had a negative impact on our construction in the quarter. But as I've talked to the operations folks, we are in check with our -- our construction plan, so I would expect -- due to that, I would expect us to see an uplift in the middle part of the year. And then, probably, towards the end of the year, you'll probably see a bit of a dip in the fourth quarter if I were to try to guess the trend.

Barry McCarver - Stephens Inc., Research Division

Okay. And then, just lastly, I know it's only been a month since you announced the sale of the wireless assets. But any more clarity about maybe the timing of when that deal closes? Where are we in the process?

Theodore H. Torbeck

Barry, we think it's going to be 4 to 6 months to get closure. So we're in that period of time where it's got to go to the regulatory, the FCC for approval. But we estimate 4 to 6 months.

Operator

And Frank Louthan of Raymond James has our next question.

Alexander Sklar

This is Alex here for Frank. On the Fioptics side, the -- one that penetration keeps growing nicely, but given the number of homes you've passed last year and this year, can you give us an update on where your penetration sits for homes passed 24 to 36 months ago? And then, on the wireline cost side, with the Fioptics video still growing, can you just talk a little bit more about where that some of the cost came out this quarter and if it's sustainable for the rest of the year?

Leigh R. Fox

Alex, I'll take a shot at the Fioptics penetration question. As we stated in the past, our historical penetration is fairly high. And you can see that in the -- as I've talked to you guys and others about in the aggregate penetration, when you're building as fast as we're building and you stay at a penetration level of the -- in high-20s, it means that a good portion of your penetration is in the high-40s percent range. And then, you've got the new customers coming on. So we're seeing just phenomenal results and we're very encouraged by everything we're seeing from a penetration standpoint. I'm sorry. Alex, what was your other question, second part of that question?

Alexander Sklar

Yes, just on wireline cost, margins expanded in the quarter, which seems a little counterintuitive given the number of videos subs increasing and programming costs? Any color -- any real color on where those savings came from and if they're sustainable?

Theodore H. Torbeck

Alex, I think, if you look, we've been -- we've done fairly well over the years in taking costs out. And Dave Heimbach and his team continue to do so. We do have a challenge in that the -- the legacy equipment has higher margins. And so it will -- it will come down at some point, not greatly, but we'll continue to look for opportunities to take cost out. And that's what we do on a yearly basis. This IT -- whole IT project is an example of that.

Operator

And next we have Alex Shanelli [ph] of SM Investors.

Unknown Analyst

May I ask you what was the consumer ARPU at this optics level for subscribers off the promotion?

Leigh R. Fox

The consumer ARPU Fioptics. We took a bit of a different approach this quarter. We actually are -- as I mentioned, when I got this job as CFO, we would begin to add transparency as we move along within the quarters, and so this year, for this quarter, we're attempting the break out the aggregate ARPU in a different level. Compared to -- if you, I think if you -- in the slide, if you add the ARPUs up, I think the total ARPU was, I think, right around what -- aggregate ARPU is right around, for Fioptics, 141. If you compare -- and effectively, what we're trying to do is we're trying to give you a view at how we build our models. So give you a little more detail by actual product line. So I think all the detail is there for you to look at and model, and -- but if you add them up, that's about, I think, where it's at.

Unknown Analyst

And so we have 141 with the promotions inside?

Leigh R. Fox

Yes, that's all in. And as you can imagine, there's still a heavy part of the base on promotion.

Unknown Analyst

Yes. Also, may I ask you just on the pension contribution? The result of the wireless divestiture, is that going to go down to cash contribution or it won't affect it, just stay in the assets?

Leigh R. Fox

I'm sorry, I didn't get the last part of that.

Unknown Analyst

I was just asking -- wondering if the cash -- the pension cash contribution, will that change -- would there be a positive change as a result of the wireless divestiture?

Leigh R. Fox

No, it won't.

Unknown Analyst

That won't, okay. If I may ask the last one. You have been amazing compared against Time Warner Cable. Do you think that might change, assuming the transaction between Time Warner Cable and Comcast go through? Do you think Comcast might be a better competitor with you guys or your product is just so better that it doesn't really matter at this point?

Theodore H. Torbeck

Well, Time Warner has been a good competitor. And we expect it to remain very competitive in this marketplace. As you can see by our success, we've been -- we're ready for it, and we just continue to get better and better. So we're ready for any competition that comes.

Operator

Next we'll move to Stanley Martinez of Legal & General Investment Management.

Stanley Martinez - Legal & General Investment Management America Inc.

Just a question first on network. And I realize that decommissioning the wireless network is kind of the key near-term objective. But from a standpoint of you guys passing 36% of your service area with fiber, I was just wondering, Leigh, what progress have the management team made in thinking about replacing the copper PSTN with GPON by decommissioning some of the central offices. And any further thoughts in terms of what kind of cost structure this could give Cincinnati longer term once you get past the wireless decommissioning project this year?

Leigh R. Fox

I appreciate the question, but I'm actually turning over to David Heimbach, our COO, who's in the room. He'd probably give you a better answer than I can.

David L. Heimbach

Stanley, we're evaluating, as many of our peers are, the opportunity associated with turning down a legacy network asset and so on and so forth, but not in a position where we want to comment on that publicly at this time.

Stanley Martinez - Legal & General Investment Management America Inc.

Is that just something that becomes more realizable as you get more and more of your exchanges served with fiber? So perhaps by the time you get to 50%, it logistically becomes easier or is it just something that is too far off at this point for you to really put some numbers around?

David L. Heimbach

No. You're making an accurate assumption. The further we get in the Fioptics build process, the easier it becomes to stomach something like a TDM turn down over time. But we're -- again, we're not in a place yet where we want to comment specifically.

Stanley Martinez - Legal & General Investment Management America Inc.

And then, Leigh, just one housekeeping question. It looked like there was some reallocation this quarter of some of the D&A and the SG&A towards wireless. Is -- was that -- did I pick that up correctly? And do you expect that to continue as you go through the balance of the year? Looked to be maybe $5 million higher in each category, wireless versus wireline, D&A and SG&A.

Leigh R. Fox

I -- honestly, Stanley, I think that's probably just a timing issue related to what's going on in the wireless, but we don't -- there's nothing specifically driving that. We don't expect that to continue.

Operator

Ana Goshko of Bank of America Merrill Lynch has our next question.

Ana Goshko - BofA Merrill Lynch, Research Division

I wanted to ask for specifics on either plans or requirements for the use of the wireless proceeds and to the degree that it is debt paydown, if you have an estimate of how much run rate interest expense savings you could generate from that.

Leigh R. Fox

Ana, this is Leigh. Thanks for the question. As I've kind of told people, our debt structure seems almost like it's game theory. And I don't care to comment on how many models we've run over the past few weeks. It's sort of embarrassing. But as it stands today, the wireless is within the restricted group. We would use any proceeds to pay down debt, we've been very clear on that. And due to the fact that we're clearly over 4:1, 6:1 right now, we would use it to pay down senior debt at this moment in time.

Ana Goshko - BofA Merrill Lynch, Research Division

Okay. So that could be really anything -- when you say senior debt, that could be anything that's either sort of term loan or...

Leigh R. Fox

Yes.

Ana Goshko - BofA Merrill Lynch, Research Division

One of the revolving facilities or the bonds. It's basically just not the subordinated notes?

Leigh R. Fox

Yes. It's basically not the sub notes.

Ana Goshko - BofA Merrill Lynch, Research Division

Okay, and then, to be clear, the plan is to pay down debt with that. I'm just wondering as you kind of -- as we look into 2015, just interest expense kind of savings estimate on that front.

Leigh R. Fox

Well, obviously it depends on which area we pay down. But with the proceeds, if we address the revolver and part of the term loan, I don't expect there to be that much in savings for the year. You're probably looking at $8 million-ish for the -- on an annualized basis.

Operator

And now we'll move on to Sergey Dluzhevskiy of Gabelli & Company.

Sergey Dluzhevskiy - G. Research, Inc.

Two questions. One question on kind of related to Ana's question, but looking at it from a different direction. Obviously, your primary priorities would be debt paydown both for wireless monetization, and also, eventual monetization of CyrusOne. But could you talk a little bit about your thoughts on returning cash to shareholders while, obviously, balancing and focusing on debt paydown priorities? Maybe you can talk a little bit about your thoughts on stock buybacks at the margin or returning cash to shareholders in some other way. And my second question is on your thoughts on Cincinnati economy and what impact do you expect from the economy on your enterprise business in the second half of this year?

Theodore H. Torbeck

Okay, Sergey. As far as a shareholder-friendly action, we believe that the best way to go would be a either buy shares -- share back or some area there -- dividends -- it is an option, but it's one we haven't in the past and probably won't in the future, give dividends, at least in the near term. But it is something that we look at constantly, and it's something that we want to get to our balance sheet at the point where we can offer some shareholder-friendly actions. And that's what we're trying to accomplish. On the Cincinnati economy, it's not -- Cincinnati economy remains fairly strong. As you know, we have many Fortune 500 companies -- Fortune 100 companies like GE Aviation that is going very strong. P&G is here, still going very strong. So as I mentioned earlier, I mean, a large part of the IT growth, our hardware sales, is with our enterprise customers, our largest customers, and they're doing very well right now.

Operator

And next, we have Arun Seshadri with Crédit Suisse.

Arun Seshadri - Crédit Suisse AG, Research Division

Just wanted to ask, in terms of the IT outsourcing project you talked about. What is the -- how much in sort of expenses do you plan to incur this year? And is that embedded in the EBITDA guidance?

Leigh R. Fox

Yes. Thanks for the question. We're not prepared to give any estimates on how much of the expense we will incur this year. But it is embedded in our EBITDA guidance. As I mentioned in my script, the 2 things that we're really watching closely are the impact of the wireless deal and the IT outsourcing. Obviously, we had a -- we feel like we had a fantastic quarter. But as we look at the year, I would say, those 2 items are a bit of headwind against guidance. We're confident, but we're watching both of them closely. But any specifics -- we're just not really prepared to give any specifics on the cost item there.

Arun Seshadri - Crédit Suisse AG, Research Division

Okay, I appreciate that. And then, as far as the 15% within the sort of the divestment or monetization of CyrusOne that you have discretion over outside of debt paydowns, that 15%, suppose you were to monetize in tranches, would that 15% apply to each sort of tranche monetization or is it a holistic number?

Leigh R. Fox

It's both really. So it would apply to each of the 15%. And we would look at it that way. So if we were to do anything -- I think, your question is more of one of kind of the timing and kind of the waiting of how that 15% could come in. We would look at it as a 15% in each tranche, so. And there is also a 35 annualized limit on carryovers, so.

Operator

And with that, ladies and gentlemen, we have no further questions. This will conclude today's conference call. We'd like to thank you for your participation.

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