Cincinnati Bell's (CBB) CEO Theodore Torbeck on Q2 2016 Results - Earnings Call Transcript

| About: Cincinnati Bell (CBB)

Cincinnati Bell Inc. (NYSE:CBB)

Q2 2016 Earnings Conference Call

August 4, 2016 10:00 ET

Executives

Joshua Duckworth - VP, IR & Controller

Theodore Torbeck - CEO

Leigh Fox - CFO

Analysts

Sergey Dluzhevskiy - Gabelli & Company

David Barton - Bank of America

Simon Flannery - Morgan Stanley

Alex Sklar - Raymond James

Jennifer Fritzsche - Wells Fargo

Operator

Please standby. We are ready to begin. Good day and welcome to the 2Q 2016 Cincinnati Bell Earnings Release Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Josh Duckworth. Please go ahead.

Joshua Duckworth

Thank you and good morning. I'd like to welcome everyone to Cincinnati Bell's Second Quarter Earnings Call. With me on the call today is our Chief Executive Officer, Ted Torbeck; and our Chief Financial Officer, Leigh Fox. Ted's comments today will recap our highlights for the quarter, provide a financial overview as well as an update on segment results. Following the prepared remarks Ted and Leigh will conduct the question-and-answer session.

Before we proceed, let me remind you that our earnings release and financial statement are posted on our Investor Relations website. In addition, you will also find presentation slides for today's call which we hope you'll find helpful in your analysis. Today's call is being recorded if you like to listen to it at a future time. Now, I'd like to draw your attention to our Safe Harbor statement presented on Slide 3.

In our remarks this morning, we will be discussing forward-looking information. Due to various risks and uncertainties actual results or outcomes may differ materially from those indicated or suggested by any such forward-looking statements. More information on potential risks and uncertainties is available in the company's recent filings with the SEC including Cincinnati Bell's annual Form 10-K report, quarterly Form 10-Q report and Form-8K 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 am pleased to introduce Cincinnati Bell's Chief Executive Officer, Ted Torbeck.

Theodore Torbeck

Thanks, Josh, and good morning, everyone. Thank you for joining us today. Our second quarter results were outstanding and demonstrates this team's ability to consistently exceed expectations. Investments in fiber assets in our IT solutions business have consistently generated impressive financial and operational results.

As highlighted on Slide 6, consolidated revenue for the quarter totaled $299 million, increasing $13 compared to the prior year. Revenue from strategic products was up 21% year-over-year, totaling $158 million. Adjusted EBITDA was $76 million, increasing 2% over the prior year. Net income equaled $78 million, including the gain on the sale of a portion of our CyrusOne investment. Diluted earnings per share for the quarter totaled $0.36.

Now I'm turning to Slide 7. Entertainment and communications segment revenue for the quarter totaled $192 million which is up $10 million over the prior year. Strategic revenues were up more than 25% compared to the second quarter of 2015, as our fiber expansion continues to drive favorable returns. Adjusted EBITDA equaled $72 million for the quarter, a 3% increase over the prior year.

On Slide 8, we summarized our entertainment and communications segment results by market. Business revenues totaled $71 million for the quarter, consistent with the prior year, as we continue to transition customers from legacy-based copper services to more strategic-based fiber offerings. We expect this trend to continue as we focus on introducing our mid-major customers to void platform customized to fit their business needs.

Carrier revenue was down $2 million year-over-year due primarily to ongoing pressures from FCC mandated rate reductions. We do not have a clear view into the extent that potential FCC reforms may affect the business. However, we continue to look for growth opportunities in areas such as small cell and added territory expansion to help mitigate any impact.

Now turning to our consumer business; revenue for the quarter totaled $95 million which is up 14% over the prior year as the demand for Fioptics remain strong. As illustrated on Slide 9, Fioptics revenue was $62 million, which is up 37% year-over-year. We ended the quarter with 127,000 video subs, up 25% year-over-year. Video penetration rates have remained consistent at 27%.

Churn was 2.5%, in line with expectations and improved from a year ago. Video ARPU totaled $83, up 8% compared to the second quarter of 2015. Total internet subscribers grew by nearly 22,000 from a year ago as we ended the quarter with than 295,000 subscribers. Fioptics internet subscribers 175,000, adding 11,000 subs for the quarter as penetration rates remain impressive at 37%. Fioptics internet ARPU was $47 for the quarter, which is up 10% compared to a year ago.

Our customers' response to our fiber-based products has been outstanding. As video content consumption evolves and demand for increased bandwidth speeds accelerates, it is important for us to remain connected to our customers and to react accordingly to their changing video and data needs.

MyTV sales continue to exceed expectations. In our Connect Cincinnati App, has increased our brand presence by offering promotions and discounts that resonate well within the local community. We remain confident that fiber is a superior asset and our ability to connect with customers as a hometown provider gives us a unique competitive advantage.

Turning to Slide 10; the IT services and hardware segment generate revenues of $110 million, which was up $4 million compared to the prior year. Strategic revenues totaled $40 million, up 10% year-over-year due largely to increases in cloud services revenue with our existing customers. Hardware sales were down 3% due to the cyclical nature of this business and the continued migration of customers to cloud-based solution.

Adjusted EBITDA for the quarter totaled $10 million, generating adjusted EBITDA margins of 9% which were consistent with the prior year. We continue to see favorable results for our business customers and believe there are additional opportunities for us to win both in and outside of Cincinnati.

Moving to Slide 11; free cash flow for the quarter was negative $26 million. Interest payments totaled $34 million in the quarter, and post-retirement payments were $2 million. Dividends received from CyrusOne were $3 million. Capital expenditures were $60 million in the quarter with discretionary investments totaling $47 million and maintenance totaling $13 million. Discretionary investments included $32 million for Fioptics and $15 million for success-based fiber build for business and managed service projects.

Specific to Fioptics, we invested $20 million to pass an additional 25,000 new addresses, giving us 60% coverage of Greater Cincinnati. Year to-date we have passed 47,000 new addresses with Fioptics and are well ahead of our build plans for the year. Based on our current trajectory, it is likely the current year build could exceed 80,000 new address with total capital expenditures nearing the high-end of our guidance range.

Now switching topics; I'd like to thank our shareholders for approving our request for a 1 to 5 reverse stock split. We believe this transaction positively impacts our business and the process is expected to be completed by October 5. We've made significant strides in our transformational efforts, and are well ahead of our expectations on all fronts. This quarter we sold an additional 3.1 million common shares with CyrusOne, using the proceeds to pay down $86 million in debt, reducing our leverage ratio to below 4 times.

We were also able to capitalize on our stock trading at a price that we perceive to be at discount by repurchasing 1.2 million shares at an average price of less than $4. As we have articulated in the past, we look at share buybacks as one of the several options for generating shareholder value. Going forward, we will actively monitor implied returns of buybacks for additional opportunities to repurchase shares.

In closing the impressive growth from our strategic products in the first two quarters gives us tremendous momentum as we move into the second half of the year, and are on track to achieve our full year financial guidance. Looking forward, we remained focused on the continued execution of our strategic objective in identifying opportunities for creating shareholder value.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll pause for just a moment. We'll go first with Sergey Dluzhevskiy with Gabelli & Company.

Sergey Dluzhevskiy

Good morning, guys. A few questions if I could. First one on competitive environment, Ted, if you could comment on what you're seeing from your competitor now under the new ownership and what are your expectations as far as competitive environment for the balance of the year maybe or the next 12 months or so?

Theodore Torbeck

Well first of all, we want to say Time Warner has always been a very competitive, always generated competitive environment and we see the same thing out of Charter. They're going to be very competitive in the marketplace and we're prepared to compete directly with them. We don't see any change of that. We think it will continue to be competitive, but we think we have a superior product and we'll continue to market that way and we'll continue to be very aggressive as we pursue additional growth in that area.

Sergey Dluzhevskiy

Right, second question on M&A. Obviously you have a solid organic growth opportunity in Fioptics as you are demonstrating quarter-after-quarter and fiber in general. But could you share your thoughts on incremental acquisition opportunities and inorganic growth, what your primary areas of interest could be and what are the main criteria, and just your general thoughts on M&A?

Theodore Torbeck

Yes, well we have, there's a lot opportunity. We have a lot of options coming to us from bankers and so forth. But we're happy where we are. We don't have to do anything, but clearly as we look to go out of territory, it is something that we will continue to look at opportunities. It's mainly in the business front, business side. The IT services side is where we see a lot of opportunities. But again, we don't have to do anything and it's something that we'll continue to look at. If it adds shareholder value, we will consider it.

Sergey Dluzhevskiy

And my last question, maybe for Leigh. You guys have a number of stores in the Cincinnati area that obviously were very important for wireless business. They're probably still important for your entertainment and communications business still, but could you talk a little bit about your presence in the area, the cost of running those stores and whether this potentially could be an opportunity for you to cut cost down the road?

Leigh Fox

Yes, thanks Sergey. Look we're constantly assessing the use of the stores. I will say that the teams have done a phenomenal job transitioning from what it was to your point, wireless-based sales to more entertainment communications. The amount of sales actually generated from the stores has increased by a substantial percent, and we're utilizing those stores for other reverse logistics purposes. But yes, we're always looking to do things more efficiently. I think one of the key elements though from a service standpoint that we have to address before we really do anything with the stores is call center, in our service through our call centers. So there's a lot of pushing and pulling in that environment and we are looking at everything, but it is actually an area we look at. We'll do the smartest thing, I think both from cost side and the revenue generation side as we can, and as we go forward, I believe there's opportunity on both fronts there, but we will continue [ph].

Sergey Dluzhevskiy

Thank you.

Operator

We will go next to [indiscernible].

Unidentified Analyst

Great, thank you. One question on the entertainment side; ARPU continues to be very strong. You had mentioned before that myTV, the skinny bundle take rates could potentially hurt that. Can you talk a little bit about what you're seeing in terms of that product? And if it in fact lowers ARPU going forward, does that also lead to higher margins? And second question on CapEx, as you near your fiber expansion target, can you talk about couple intensity, maybe going forward? When you talk about out of region, is it more scale-driven or more capabilities that you want to add to your services? Thanks.

Leigh Fox

This is Leigh. On the MyTV front, I think you're not seeing enough in volume from the sales standpoint to really see the ARPU move or enough needed in the ARPU yet. But as we analyze these customers, we actually do see a reduction in ARPU, but ultimately what we see in at least today is approximately an 8% lift in EBITDA from those customers. So it's working the way we thought it would work. It's just, from a scale standpoint; it's still pretty small percentage of our overall customer base. So I just don't think you're going to see that thrive through the average metrics for a little bit here. But I would expect to see some flattening out as it comes to the end of the year and maybe in the next year, on the flattening out of the growth rate. On the capital side, I would say that we, as Ted mentioned in the script, we're ahead of our plans on the build and from a capital efficiency standpoint. We're pretty happy with what we're seeing. Our focus right now is continued build in territory and trying to get as much penetration in territory, it makes logical fan. We'll continue on that front.

As we look out of territory, it's going to be from a very capital efficient standpoint. We're not looking to be a massive over builder anywhere. There are a lot of opportunities to take advantage of, maybe creeping up north with our Fioptics and doing it a very efficient manner. It's all going to be returns-based. We've been fortunate enough to implement enhanced data analytics that we can land to other territories. We've gotten a lot smarter at this. But right now we're really focused on getting as much bank for the buck in territory which means we think we could probably hit more customers than we originally thought in territory here as we move forward. But again, added territory will be more than likely capital light or very capital efficient.

Theodore Torbeck

So we're very focused on the customer experience and where we build out the - we're looking to go back and rebuild in some of those areas. So I mean that's another opportunity for us.

Leigh Fox

Yes, we have on the over build standpoint, we're seeing a clear differentiation and take rate, especially on internet between where we have fiber to the note and fiber to the home. We are assessing what makes sense but if you can get 50% plus market share at fiber to the home which is what we're seeing over time. I mean that's, in our mind you just keep building, that's a great business model.

Unidentified Analyst

Right, thanks. With maybe just one follow up after that potentially with light CapEx or couple intensity potentially coming down, and you mentioned that buybacks could be one of the options for generating shareholder value. Is there a timeline that we could look forward to? How do you balance the two?

Leigh Fox

Going forward, I'll take a shot at this and let Ted answer, I think going forward we look at cash flow and spend. You're going to see us talk a lot more about discretionary capital versus maintenance capital, and what we do from the discretionary standpoint and how that impacts cash flow. As we mentioned, we believe we'll be cash flow positive next year, then it's what do you do with cash, and it's going to be all about return and balancing returns. I think the great thing about this company is we continue to see opportunities to grow and see returns for our shareholders in our investments. And as you saw this quarter, we bought back a small amount of shares because we got further ahead of where we thought from a debt standpoint, and we looked at the share price and it was just, it was almost a no-brainer to begin buying it at the implied return, so we did. So it's a balance of the use of your discretionary cash versus where you think you get the greatest return for shareholders.

Theodore Torbeck

Yes, I was going to say, I was going to answer that the purchase price that we bought was under $4, and we quit buying after our stock went up. So we're very conscious of getting a return and we have a lot of options to generate returns and just one of them.

Unidentified Analyst

Okay, great, thank you.

Operator

We'll go next to David Barton with Bank of America.

David Barton

Hey, guys, thanks for taking my question. Just looking at the, I think the $21 million that you spent getting the incremental 25,000 homes patch for the Fioptics program. I guess that implies about $840 per home. I was wondering, could guys kind of talk about where that has trended through time, and as you look out ahead whether as you get further and further away from the core, does that kind of tend to go up or down as technology cost get improved? That will be helpful there. And then second, kind of after the 840 per home path, could you talk about the capital investment necessary actually connect the incremental Fioptics customer going forward? Thanks.

Theodore Torbeck

Dave, our plan all along has been to start with really in the beginning cherry pick where the cost would be the least and we build out that first. So our whole plan all along as we build out we knew that the expenses would go up. The good thing is we are underrunning what we thought the plan would be, and by a significant amount. So we're doing a lot better than we anticipated from a cost perspective. But as you look to go forward, and again once we see the returns not to what we like, we're going to start pulling back. But we're very happy where we are from a cost perspective, compared to the original plan, but we fully understand going forward as we slow down the build the reason we're slowing it down is because it's beyond the levels that we want an acceptable return.

Leigh Fox

And Dave, on the [indiscernible] piece, as Ted mentioned, as we build we're seeing a slight increase in the cost per build, but as he mentioned it's not as much as we had anticipated which means we are getting more efficient, we know where these efficiencies are coming from. And the same as happening on the install, we are seeing variations in install and it depends on the types of install. But the things that we look at from an efficiency standpoint are you're beginning to hit homes that have, we've installed before. So there's less cost and less time involved. We're seeing efficiencies being gained in reverse logistics, the reuse of assets.

And as you build a business up, these were things we were sort of guessing at, we knew we'd see efficiencies in. We're now seeing the efficiencies and we're better, we're in a better place to analyze and build the analysis going forward. And then on the cost from a vendor's standpoint we've done a good job just managing cost and being efficient with vendors in getting better built and installs. So I would expect the install to remain flat in the short term but they getter overtime as we reuse more assets and we penetrate more of the market with installs.

David Barton

Can you put a number around that, like is it a couple of hundred or 500 kind of roughly or percentage of the total?

Leigh Fox

I think today we run about 700 and change, and I would say, the way I view it is it stays around that for now, and then reduces into the 6's overtime. I think that's probably a little conservative, but that's sort of where my head's at.

David Barton

Kind of drop player plus set top box type of components?

Leigh Fox

Yes, and then the thing that I'm cautious around with my language is we're also looking at self-installs and the ability to do self-installs. So if or when, as I think it's more like when we launch that that could have a dramatic impact on that number.

David Barton

Got it. Thanks, guys.

Operator

We'll go next to Simon Flannery with Morgan Stanley.

Simon Flannery

Great, thank you very much. And just following up on David's question; how are you thinking about something like 5G, Verizon's been talking about the ability to drop down some of that install cost with last kind of few hundred feet using wireless. Is that something you might be interested in? And then I was interested in the stats you gave around Fioptics. Clearly the broadband penetration's well ahead of video and voice. So what are you seeing in terms of the bundles that are selling the best and people's desire just for a single play, broadband versus double or triple play? And any more color you can give around the speeds so that people are taken to drive that ARPU? Thank you.

Theodore Torbeck

I'll start with your second question, Simon. The Fioptics is about 50 megs is what they're taking. We're, so that's...

Leigh Fox

Probably that's what's built in the triple play and the triple play is what we see the highest - still, obviously we see a lot of internet only sales due to the penetration, but the triple play is still the most popular bundle that we have.

Simon Flannery

Okay.

Leigh Fox

And then on 5G, I'm going to take a finance guide, hack on the technology question, but we have a lot of very smart technical people, I believe some of the smartest in the industry. I think what they look at today is more how does Wi-Fi and wireless interact within the home and make it easier for the home. I'm not sure we're at the point where we're looking at 5G from the curve into the home. I think there's a lot of, as I've had discussions, a lot of interference issues from the standpoint of what that does to like a TV signal. I mean it's interesting to talk about with internet, but on TV I don't think it necessarily works. It's still pretty CapEx intensive also, if you think about it. So I don't know that you'd gain that much from a CapEx standpoint, but we do look at it and but right now I would say it's more of an interesting concept to look at more than anything.

Simon Flannery

And just coming back to the broadband, the ARPU's performing very well. Is that price increases or people actually taking higher speeds versus, let's say a year ago?

Theodore Torbeck

Combination of both. They're taking higher speeds and we're getting price increases.

Simon Flannery

Okay, thank you.

Operator

We'll go next to Alex Sklar with Raymond James.

Alex Sklar

Great, thanks for taking the question. Just want to ask on the enterprise side, if you're seeing any changes and enterprise trend in terms of what they're buying from you, and then maybe an update on what you've been doing out of region in this segment. In the prepared remarks I think you mentioned there were some additional opportunities you were seeing, so a little bit more color on that would be helpful. Thanks.

Theodore Torbeck

Well we're seeing hardware sales decline on the enterprise side and more increase in cloud, the cloud usage. So we think that's a trend that started and it will continue.

Alex Sklar

And on the cloud, what specifically in the cloud are they buying from you or what are you helping them install, public cloud deployments or more managed services in your own servers?

Leigh Fox

It's' a combination of both. It's cloud deployment on our own infrastructure, it's migration services, it's also managed outcast, so it's cloud-based voice. Obviously it's the telephone company, a core competency of ours, and we're seeing a lot of traction on the managed voice or cloud-based voice products.

Theodore Torbeck

Very large growing opportunity for us.

Alex Sklar

And then on the out of market with the segment?

Theodore Torbeck

It's the same, we're seeing a lot of the same.

Leigh Fox

We're seeing pretty consistent growth out of market, but it's again, we're doing it organically at the moment. And it's just slow and steady, and we're seeing traction.

Alex Sklar

Okay, great. Thank you.

Operator

We will go next to Jennifer Fritzsche with Wells Fargo.

Jennifer Fritzsche

Great, thank you for taking the question. I apologize if this was brought in the prepared remarks. But it's my understanding in neutrality you don't have any limits due to your pricing, Central Link is trialing in some areas and I know that some of the MSOs are as well. Have you begun to do that or is your thoughts there for higher speeds, higher price, et cetera? And then if I could also ask on special access, can you quantify your exposure there?

Theodore Torbeck

Yes, I'll take a step at the first part of the question, there's no really no impact on how we think about pricing in that neutrality right now which is the way that our networks are protected, it's a non-issue, non-event. On special access, first of all we believe the FCC is moving very fast here. We have recently joined the coalition that's invested in broadband for America. So we're working very closely with the FCC on this. We have some major concerns, like other partners in the coalition, mainly around data use in the analysis is obsolete. What we see with this policy change would be reducing investment, job loss, so we're very, there's really nothing to find yet. So it's hard to predict what impact us. So and again, I think working with the FCC will come up with a solution that will be acceptable to us.

Jennifer Fritzsche

To explore [ph] your answer a little bit; would you consider doing tiered pricing? I guess it's more of what I was trying to ask.

Theodore Torbeck

I'm not going to answer that until we really know where we are and we'll adjust accordingly.

Jennifer Fritzsche

Got it, all right. Thanks very much.

Leigh Fox

Yes I mean, I think you see people looking at tiered pricing, consumption-based pricing, we're just - we're not going to be a market leader on that.

Jennifer Fritzsche

Got it, I appreciate it. Thanks very much.

Operator

This does conclude today's conference call. Thank you for your participation. And you may now disconnect.

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