Cincinnati Bell Inc., Q4 2007 Earnings Call Transcript

Feb.10.08 | About: Cincinnati Bell (CBB)

Cincinnati Bell Inc. (NYSE:CBB)

Q4 2007 Earnings Call

February 7, 2008 10:00 am ET

Executives

Traci Bolte - VP of IR

Jack Cassidy - President and CEO

Brian Ross - CFO

Analysts

Simon Flannery - Morgan Stanley

Brian Murphy - Bear Stearns

Dave Stoddle - JP Morgan

Jason Patterson - Raymond James

Gaurav Jaitly - UBS

Operator

Good morning, everyone. Thank you for holding and welcome to the Cincinnati Bell Fourth Quarter Earnings Call for 2007. Your host for today's conference will be Ms. Traci Bolte. Today's conference will begin with prepared remarks followed by a question-and-answer session. Instructions on that feature will follow later in the program.

I'd now like to turn the call over to your host, Ms. Bolte. Please go ahead.

Traci Bolte

Thanks, Betty and good morning. I'd like to welcome everyone to Cincinnati Bell's fourth quarter earnings call. With me on the call today are President and Chief Executive Officer, Jack Cassidy; and Chief Financial Officer, Brian Ross. This morning you will here from Jack about 2007 results and 2008 focus areas followed by Brian's comments on fourth quarter operational metrics and financials and 2008 guidance.

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 useful in your analysis. Today's call is being webcast, if you would like to listen to it at a future time.

Now I'd like to draw your attention to our Safe Harbor statement. Information in today's presentation contains certain statements and predictions that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. In particular, any statements, projections or estimates that include or reference the words believes, anticipates, plans, intends, expects, will, or any similar expressions fall within the Safe Harbor for forward-looking statements contained in the Reform Act.

Actual results or outcomes may differ materially from those indicated or suggested by any such forward-looking statements. More information on potential risks and uncertainties is available in the company's recent filings with the Securities & Exchange Commission including Cincinnati Bell's annual Form 10-K report, quarterly Form 10-Q reports and Form 8-K reports.

This presentation also contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are also available on our website. The forward-looking statements made on this conference call represent the company's estimates as of February 7, 2008. The company anticipates that subsequent events and developments will cause its estimates to change.

With that, I'm please to do introduce Cincinnati Bell's President and Chief Executive Officer, Jack Cassidy.

Jack Cassidy

Thanks Traci and good morning everyone. We really appreciate you joining us today. Cincinnati Bell made great progress in 2007, as we executed our plans for growth in data centers, wireless and DSL particularly in the enterprise space. These results included increased data center capacity utilization, strong performance in wireless revenue and EBITDA and double digit growth in revenue from data expansion markets and long distance.

In total for the company top line revenue improved by 6% EBITDA grew by 3% and earnings per share excluding special items increased by 7%. Throughout the call, today we will be providing more detail and insight into these results, and why we believe operations are very well positioned for success in 2008.

Let me begin by looking at the key factors contributing to the success in 2007. Full year revenue totaled $1.3 billion, which was in line with guidance. As shown on the chart on slide 6 of this presentation, technology solutions revenue grew $42 million and 19%. This was driven by a 43% improvement in data center managed service revenue and 11% growth in telecom and IT equipment revenue.

Wireless revenue increased $33 million largely the result of a 13% increase in service revenue. Wireline data, which includes DSL and data transport increased by 9% and long distance revenue, grew by 10%. These improvements more than offset the decline in wireline voice revenue.

This revenue growth help produce EBITDA of $473 million up 3% year-over-year. The chart on slide 7 illustrates how the company's ability to drive EBITDA growth in wireless and technology solutions again more than offset a decline in wireline EBITDA.

As you can see on slide 8, the solid execution of our 2007 strategy resulted in year-over-year growth of 7% earnings per share excluding special items. Special items in the quarter included a pretax restructuring charge of $38 million related to initiative design to improve our future cost structure. Going forward expenses must be in line with the anticipated revenue across the company's business units.

During 2007, the company is focused on wireless technology solutions and wireline data resulted in further product diversification. Your chart on slide 9 illustrates that 83% of service revenue in 2007 was derived from areas other than the traditional consumer wireline voice traffic compared with 80% in 2006.

As such business markets revenue continues to increase, as a percent of total revenue, not only are we expanding relationships across all lines of business customers, but also across all of our major project areas. For example revenue from data center managed services increased 43% in 2007. Wireless service revenue from business customers grew by 17% and business access lines were actually up almost 2%. As a reflection of this growth business markets revenue represent a 57% of total 2007 revenue compared with 55% in the year of 2006.

A key factor contributing to this growth has been our ability to keep pace with strong demand for data center capacity. As you know, last year we announced plans to nearly double our capacity by the end of the first quarter 2008 this will be accomplished. As you can see on slide 11, we had 144,000 square feet of capacity at the end of 2007 and this includes 13,000 square feet of fully utilized capacity from the acquisition of GramTel USA. In this acquisition, we acquired an additional 9,000 square feet that's currently construction. Capital required to complete this additional 9,000 feet of construction is minimal.

Demand in this space remained strong, as indicated by the signing of the long-term managed services contract with the Kroger Company for 25,000 square feet of premium data center space. In addition, the sales funnel is robust and we are excited about the outlook for this business. We are currently in negotiations with existing and potential customers to fill all space currently under construction.

Additionally, we see the opportunity to leverage our success with the Cincinnati Bell Technology Solutions Group and large enterprise customers by providing data center managed services to small-to-medium businesses. This growth potential drove our decision to acquire GramTel.

Now GramTel is a provider of co-location disaster recovery and backup data services and targets mid-tier businesses in the Midwest. Their approach has been to focus on the vertical markets that are intensive, such as; healthcare, legal, financial and educational. By purchasing GramTel, we expand our success presence on a regional basis, gain access to mid-tier customers and leverage opportunities to increase revenue per square foot.

In addition to GramTel, we also finalized the previously announced agreement to acquire eGix on February 1. And as you can see on slide 13, eGix is a facilities-based CLEC serving small and medium-sized Midwestern businesses. They are based in Indianapolis and offer a full line of managed IP solutions. We view this acquisition as an extension of the successful other territory business market strategy that we have implemented in the Dayton, Ohio market.

It is a strong, scalable distribution channel with which to sell data center and other IT solutions. The eGix and GramTel acquisitions are complimentary in the products they provide, the customers they serve and their geographic locations. In addition, the return on investment equals or exceeds the high rates return from our existing data center investments.

In summary, 2007 was the confirmation of the de-levered defending growth strategy. By executing on initiatives to achieve growth in wireless, wireline data, data centers and business markets, we produced now our ninth consecutive quarter of year-over-year growth and revenue and our sixth consecutive quarter of year-over-year EBITDA growth in our three operating segments and growth and earnings per share excluding special items.

In addition, we continue to successfully address the challenge of intense competition by delivering top quality network performance and new integrated products such as our UMA Wireless/ DSL product. We began the build out of our 3G wireless network, which will yield network capital efficiencies beginning in 2008 and we made two modest, but very strategic acquisitions to expand our geographic footprint.

We are also pleased and proud to share with you recent recognitions that our broadband and wireless services have received. For the third consecutive year, Cincinnati Bell Wireless earned the title of best network within our service area based on independent study. In addition, based on viewer responses to new nation wide survey in the February issue of Consumer Reports Magazine, ZoomTown, Cincinnati Bell's Broadband product scored in the top three for Internet Services after Verizon's FIOS and Wide Open West.

Since Verizon FIOS and Wide Open West are not available in the Cincinnati area that of course means that ZoomTown rated highest among local carriers certainly beating out the competitive efforts of Time Warner and Insight. These recognitions are clear indication of Cincinnati Bell's dedication to delivering the best network products and services to our customer at the best value.

Looking forward to 2008, we plan to continue the momentum in the business market revenue growth and expand wireless profitability without slowing down the subscriber growth. We must minimize the impact of in-territory consumer access line loss and we will pursue additional growth in data services, expansion markets and leverage new integrated products, while pursuing ongoing cost reduction initiatives.

I'm very pleased to announce that the Board of Directors has taken next step in the return of capital to shareholders by authorizing a $150 million share repurchase plan over the next two year period. Although we still remain committed towards the leveraging story, we believe our strong cash flow and balance sheet give us the appropriate opportunity to begin a share repurchase program.

We have made significant progress since the sale of broadband business at the end of the second quarter of 2003. We have refinanced high-coupon debt and extended debt maturities. We have reduced our net debt by $850 million, which came over half of which from free cash flow. Despite a complete cable VoIP Overlay and wireless substitution, we continue to manage the financial effects. Even though, we have significantly invested in our data center and wireless business our cash flow remains stable and strong.

Now, I'd like to turn the call over to Brian Ross, our Chief Financial Officer, who will provide additional detail on the performance of the fourth quarter and outlook for 2008.

Brian Ross

Thanks, Jack and good morning everyone. As you just heard Cincinnati Bell's strong 2007 performance was the result of growth in the Wireless and Technology Solutions segments. In my remarks today, I'll review fourth quarter performance by segment then provide information about capital free cash flow and 2008 guidance.

Let’s begin with the Wireless segment, where revenue increased by $9 million or 13% to $77 million compared to the fourth quarter of 2006. As shown on slide 17, we continue to achieve double digit growth in Wireless Service revenue and EBITDA. Service revenue grew by $8 million or 14% from a year ago reflecting a 9% increase in the postpaid subscriber base.

This marked the sixth consecutive quarter of double digit growth in Wireless Service revenue. This service revenue growth increased segment EBITDA by $4 million or 28% from a year ago. As slide 18 illustrates, this service revenue increase also produced $4 million of margin growth, which led to an EBITDA margin of 25% up from 22% in the fourth quarter of 2006.

Looking at postpaid unit growth, net activations in the quarter totaled 9400 down 40% from a year ago and equally affected by gross activations and DX. Churn was 1.59% compared to 1.52% from a year ago and 1.67% in the third quarter. Despite lower consumer postpaid net adds, we leveraged upgrade and new subscriber traffic to drive high value smart plan sales such as BlackBerry sales.

As such those plan sales increased over 200% compared to the fourth quarter of 2006. These and other new data plan additions continue to drive data subscribers, overall data usage and data ARPU. In the quarter postpaid data ARPU was $6.96 compared to $5.75 a year ago, a 21% increase. Data ARPU was 15% of total ARPU.

Slide 20 outlines prepaid results. Sales of higher usage plans continue to drive improvement in a prepaid ARPU, which was up 15% year-over-year. This along with 5% subscriber growth resulted in prepaid service revenue of $13 million up 22% from a year ago.

Turning now to the Technology Solutions segment, quarterly revenue was $78 million up 26% year-over-year. As shown on slide 21, Telecom and IT Equipment revenue increased $8 million or 17%, while data center and managed services grew by $7 million or 53%.

Gross profit margin expanded $5 million or 47%, as a result of both revenue growth and gross margin percentage expansion. Data center and managed services and telecom and IT equipment contributed equally to this increase. EBITDA for the quarter was $10 million, a record quarter up 76% from a year ago.

In the Wireline segment, EBITDA of $97 million was up slightly from a year ago, a $5 million increase in data revenue and a $5 million decrease in cost offset a $10 million loss of voice revenue. The cost reductions reflected a $3 million decrease in postretirement and pension benefits, plus a nonrecurring $4 million fourth quarter 2006 operating tax expense. These items more than offset $2 million related to compensation increases.

The charts on slide 24 illustrate the growth occurring in our expansion markets, where we offer a full service bundle to consumers as well as our complete range of business services. Revenue in the CLEC, which is historically been located in areas immediately surrounding Cincinnati increased $3 million driven by 24% access line increase and a 96% DSL subscriber growth. These fixed assets encouraged us to expand into Indiana by recently acquiring GramTel in Egypt.

Moving on to slide 25. Total DSL subscribers increased to 222,000 up 12% from the fourth quarter of 2006. Penetration of consumer in-territory primary access lines reached 42% an improvement of 8 percentage points from a year ago. DSL churn remained low at 2%. Access lines decreased by 6% to 834,000, business lines increased by 2%. The 24% increase in CLEC access lines partially offset a decline of 7.7% in our traditional operating area. As depicted in slide 26, the year-over-year gross add declines appear to be to destabilizing, while churn is staying well below 2%.

Turning to Capital. We invested a total of $81 million in the quarter including $33 million for data center construction and $22 million related to wireless and the build out of our 3G network. For the year, capital expenditures totaled $234 million or 17% of revenue up $83 million year-over-year. This increase is related to the 85,000 square feet of data center space, either completed or currently under construction.

For the year, we generated $59 million of free cash flow, which exceeded guidance by $9 million both increased EBITDA and lower capital spending drove this result. Also, in the fourth quarter free cash flow -- also included in the fourth quarter was the first of two $21.5 million customer prepayments. The second or remaining payment will be received in the first quarter of 2008.

The 2007 prepayment enabled a $20 million early pension payment funded the management early retirement benefits, eliminated the need for a required 2008 contribution and reduced mandatory contributions related to the new pension legislation, which requires funding through 2013.

As illustrated on slide 29, we deployed our 2007 free cash flow to acquire GramTel in the cable access in Lebanon, Ohio which line our CLEC territory. The balance was used to reduce net debt. After $9 million of new capital leases, we reduced net debt by $27 million in 2007.

As shown on slide 30, in addition to the $27 million net debt reduction the company has also recorded $73 million of pension and post retiree liability by taping retiree medical and reducing retiree life insurance benefits. In summary, we have reduced net debt pension and retiree medical liabilities by combined total of $100 million.

Continuing to improve our cost structure is a key to continued profitability growth. In addition to the retiree benefit changes, we have also begun new initiatives to reduce future labor costs. In the fourth quarter, we have incurred a $38 million pretax restructuring charge related to these initiatives. As previously disclosed, Cincinnati Bell offered a voluntary early retirement incentive to approximately 230 retirement eligible management employees. 45% or 105 employees accepted this offer.

We have incurred $9 million in the quarter related to this voluntary offer and we will incur an additional $4 million, as these employees retire over the next three years. Also included in the charges a $6 million curtailment charge, which accelerates the recognition of pension and postretirement expense for management employees, who will be departing the company.

Finally the charge includes $23 million for other workforce reductions occurring over the next few years. These actions coupled with our 2007 performance provide solid momentum going into 2008. Financial guidance for 2008 is $1.4 billion of revenue and $485 million of EBITDA, an increase of $12 million, as we expect our growth businesses and cost reductions to outpace the impact of access line losses. We are guiding capital expenditures to 16% of revenue. This includes the build out of 50,000 square feet of additional data center capacity some of which will likely not come in line until the first quarter of 2009. The CapEx guidance also includes approximately $19 million of the $30 million initial 3G network construction.

Turning now to free cash flow guidance, we expect free cash flow to be $150 million in 2008 compared to $59 million in 2007. There are three main factors that are contributing to this significant growth, the previously mentioned EBITDA, lower interest payments and $66 million of cash flow from working capital and other sources, $32 million of 2007 nonrecurring operating taxes, tax payments and $24 million of 2007 pension payments will not reoccur in 2008. This constitutes the majority of the $66 million.

Clearly 2007 was an outstanding year for Cincinnati Bell. We grew revenue and EBITDA, maintained our focus on product and customer diversification, invested for the future and manage cost reductions efficiently. These accomplishments set a stage for success in 2008 enable us to continue de-levering our balance sheet, by also returning value directly back to our shareholders through the share repurchase program announced today.

Now, I'll turn the program back over to Traci.

Traci Bolte

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

Question-and-Answer

Operator

(Operator Instructions)

And our first question comes from Amy with Cedarview Capital. Amy, your line is open. Amy? Okay. We'll go to the next caller. Our next caller is Simon Flannery from Morgan Stanley. Simon, your line is open.

Simon Flannery - Morgan Stanley

Okay, thank you. Good morning everybody. Nice to see the buyback would it be possible just to talk about the thought process comparing buybacks versus dividends? And how you are thinking about balancing de-leveraging and buyback is it dependent on where the stock price is, where the economy is and I don't think you really mentioned the economy at all during your commentary, is there any real change in sort of things like bad debts or given the Cisco's comments last night concerns that enterprises are slower in terms of making decisions about new orders? Thanks.

Brian Ross

Thanks, Simon, good morning. On the economy first, geez after Randall's offhanded comment caused the market to meltdown. I want to be careful that people aren't going to misquote Cincinnati Bell, the market leader in the economy thought. What we see here and again we are one half or 1% of the population of the United States, but very Midwestern.

What we see here is certainly people are reading the newspaper and thinking about their expenditures and they are looking at their homes and those kinds of things. So, I think being in Midwestern our customers are being frugal in terms of their thoughts on price value relationships and the providers that they are choosing. So, on the other hand I think that pressure is kind of always been with us in the consumer world.

So it's clear that people will continue to say can one product provide the cost benefit relationship associated with another product and can I save money by having this product versus that product and that's a competitive world and the game that we live in. And I think as obviously as younger people come up and they think about the expense of a landline associated with their apartment rent or purchase of their first home, I think that the landline has come under pressure and we've always talked bout wireless substitution. The good news is we happened to have a wireless business that more than offsets that along with these customers also very broadband dependent. And we happened to have a broadband business, where we can win in that game as well.

So, from the consumers' viewpoint I think people are being [frugal] but we certainly haven't seen anyone, nor do I think any telecom company or cable company for that matter we're seeing anyone trade in their cell phone or disconnect their broadband service or turnoff their entertainment service because of the economy. I think these are products that are both recession and recession proof in terms of their viability and the current need for them in the consumers mind.

On the enterprise side given the fact that we've GE aircraft engine, we've Cintas, we've the Kroger Company, we've Fifth Third, these companies first of all, I think these companies represent something that's happened across America that I don't read in newspaper headlines.

These companies balance sheets are in better position now then they have been in the last 50 years. And so I think that the strength of these businesses and the resulting balance sheets that they have bode well for us and that these are our key customers. And if we look at again back to, if we just look at data center managed services or equipment around those businesses or equipment for to lessening use the good new is that we provide services that are more efficient and more productive for these businesses than maybe them doing them themselves, and I think that's very clear in the Kroger announcement. When you look at our 15 year contract with them that they can have, it done by us more efficiently than they can do it themselves and by the way there is plenty in it for us to be able to not only benefit from the margins associated with that, but also to expand our existing relationship with that company and with others.

So, I'd tell you that I believe that the economy has caused all business whether it's very small businesses or for that matter GE to re-look and redouble their efforts on productivity gains, as they get ready for whatever might be in front of them. But frankly Simon, I'm going to take maybe a little bit different tact on this, I don't think it’s any -- I think everyone has been focused on this for the last five years. I don't really see anything different than what people have been focused on.

The good news is that it's caused across their businesses those companies to look at companies like mine and say what can you do for me and it's taken some of the organizational angst out of it, as we can provide solid cost benefit relationships back and force. So, that’s the good news.

In the SMB space, I just see again as the big enterprise businesses have been driving for productivity gains. SMB, we finally have a network and equipment and productivity tools that can fall down from the large enterprise business into the SMB space and I see that whole market is being very, very hungry for gains. And if I look at the revenue and the profitability of my own business in that segment 2007 was kind of the year of renewed birth inside that business and I think we've made significant gains.

In the area of what was the thought process behind share buyback versus dividends, I'm not against dividends per se. But I do believe that $250 million roughly $250 million shares, I think we've too many shares outstanding and for a company of our size and so that came into effect.

And I do believe that when you buyback shares, you've increased both the shareholders perspective, but you've also kept your powder dry for other users of the cash in terms of the equities you are buying back, and when you pay a dividend and I think that's money that's kind of sale forever and although, I'd like to be in a position someday, where we are paying a dividend reward the shareholder. I think we're equally rewarding the shareholder to stock buybacks as opposed to the dividend. If we've had a history and I read your article yesterday and I read it today you are one of my favorite writer Simon, so I do pay attention to what you are writing.

Simon Flannery - Morgan Stanley

Thank you.

Brian Ross

But if you look at the history, again, I don't know that there were many telecom companies that grew top line and bottom line EBITDA results last year and there has been a lot of fear in the market that; oh, my god, this company is going to be overrun by the Godless hordes of the cable companies.

Well, you've to look at your market segmentation and you got to be able to say in this particular area I've got to make investments to be able to defend. But in these other areas, I got to make investments to grow. And as you all know last year, we announced major data center build that EBITDA and the revenue associated with that is just now flowing through the business, which drives top line and bottom line.

At the end of the day, I'm concerned about every market segment. But at the very, very end of the day, I'm concerned about how the numbers add up. And the numbers add up, I think pretty well in terms of top line and bottom line and if you look at our guidance for next year we are obviously very, very bullish on the prospects of growth for next year.

Simon Flannery - Morgan Stanley

Good, that's very helpful. Thanks.

Operator

Thank you. Our next question comes from Mike McCormack with Bear Stearns. Mike, your line is open.

Brian Murphy - Bear Stearns

Hey guys, its [Brian Murphy] sitting in for Mike. Two quick ones, first you mentioned working cap for 2008 is there anyway we should think about that on a quarterly basis, it's something that we find are particularly hard to breakup when we look forward? And then secondly, if you wouldn't mind maybe commenting on the competitive environment in the wireless space particularly as it looks like prepaid might be some more of a focus for the big guys, just wondering what pricing is looking like and how you guys may want to compete? Thank you.

Brian Ross

Brian I'll start with the working capital and let Jack comment on the competitiveness of the wireless space. Really, two things going on in working capital most of the increase in cash flow related to working capital is related to items that we paid for in 2007 that won't recur in 2008. So, that won't really have much of significance in terms of quarterly impact.

What really drives the seasonality of the working capitals are interest payments. So, we paid bond interest in the first and third quarter and very minimal amounts in the second and fourth quarter. So, we've about a $50 million working capital swing quarter-to-quarter related to those items.

Jack Cassidy

And Brian, I'll comment on wireless but also say that you can discuss this offline with Traci, as can anyone else. As I'll look at it the free cash flow growth from forecasted $50 million in '07, which ended up at 59 to $150 million of free cash flow is driven a lot by changes in working capital. And if you noticed in our notes today and again you can get it into it more with Traci later with Brian.

We also made $24 million worth of prepayments to the pension account, so and reduced future cash liabilities by almost an excess of $100 million. So, not only did cash flow grow over year-over-year, but we also reduced those liabilities. We build the lot of data centers, we feel that bullish that we'd announce the stock buyback plan. We think the equities are great value. And so on a quarterly basis outside of working capital, we are going to do make the investments on a quarterly basis and that which we believe drives the most in shareholder value.

So, moving from there to competition in wireless. I’ve said many times that if GE isn't the best run company in America and most of you know that’s my alma mater. If they aren’t the best run company in America, I really believe that Verizon Wireless is.

I mean these guys are great competitors and we fight it out with them everyday and although I'd like to beat them up better they are not been able to, it's always fun being in a match with the good competitor. And I think that AT&T is coming on they have been very efficient in what it is they’ve done in emerging those markets together and they have been very thoughtful in terms of being able to do the iPhone with Apple.

I see that by the way the iPhone has being fundamentally a great value to all wireless companies in the United States, because that display technology is going to be knocked off and/or in fact improved by other companies and will add more value to the subscriber, as we go forward. So, I saw it as a breakthrough. I think it’s great. I’m jealous that I don't have it. But we are talking to other manufacturers about how to get even improved handsets to be able to do that.

So you say well, geez, I mean again we're 1.5% or 1% of the population in the U.S. We're just a little hillbilly telephone company. How can we ever stand up to Verizon and AT&T by our own admission say they are great competitors. I think that the national carrier as compared to the regional carriers I think have announced and you'll see other results announced later that on a pro-pop basis our productivity was about half of what the national carriers were but our productivity on a pro-pop basis was pretty much in access of what the other regional carriers were.

Now I'm not happy with that okay. But I do believe that scope and scale gives these guys an advantage. But if you look at the quality of the subscriber that we added in the fourth quarter we had a $99 pearl and again we're no contract player. We put that pearl out there because we believe that the marketplace is transitioning that certainly that the -- where our strong shoot is in the customer base those customers have coming out of voice only traffic and upgrading into data traffic and we took it through what our data ARPU was.

We see the quality of that subscriber in terms of their ARPU and the profitability of that has being very, very good. And we're right now basically, as we said building out the 3G network that we think will give us some advantage in Cincinnati in front of our competitors. And we believe that innovative calling plans like free Bell-to-Bell calling from wireless to landline or whatever continues to drive subscriptions and we've yet to really pull the trigger on our UMA product in certain segments of the market and I think we'll able to announce something in the first quarter about that.

So, I think these guys are tough and it's a NASCAR race. There isn't a checkered flag at the end of this thing and I wish that our subscription rates in wireless could have been better in the fourth quarter. But from my view, there still will be predominant market share in Cincinnati of all the other wireless carriers and we continue to think we are going to hold that share.

Again, your focus is on postpaid. Prepaid is a very important part of our business. We are one of the first carriers to show that you can make a profit in the prepaid business and that business continues to be extremely profitable based on market segmentation. So, I hope, I haven't gone on too long in the answer but that's what I think.

Brian Murphy - Bear Stearns

Great, thank you.

Operator

Thank you. Our next question comes from Jonathan Chaplin of JP Morgan. Jonathan, your line open.

Dave Stoddle - JP Morgan

Good morning. It's actually [Dave Stoddle] sitting in for Jon. I wanted to ask you three quick questions. The first one of which was just a little bit about the share repurchases and the timing. How should we think about that over the next two years is that something we should expect pretty evenly quarter-to quarter. And if we are thinking about it that way, if you've a $150 million of free cash flow and $75 million for share buybacks, what do you planning to do with the remaining $75 million?

And the second question is I just was hoping to get a little bit more color on the CapEx. I think you had mentioned about $19 million of the 3G CapEx was baked into the numbers. I think you had alluded to the data center CapEx as well I may have missed that number, if you could just fill me in with that. But ultimately, where do you see the data center as far as the capacity kind of running over the course of this year?

And then just finally, a little bit if you could comment on wireless margins, they held up pretty well this quarter. We were thinking they are going to have a little bit more pressure from seasonality and so forth. What's kind of the outlook that you are seeing here in the first half of '08?

Jack Cassidy

Yeah, on the wireless margin actually grew 4% I think from 22% to 26% on the EBITDA margin line. Brian will tell me if I hit that wrong.

Brian Ross

Yeah a point high.

Jack Cassidy

I'm a point high, okay from 22 to 25. And we've said in the past that we expect the EBITDA margin in that business to achieve a minimum of 30% level. Now for those of you, who were on the call that haven't filed the history of the company we do not have margin associated with roaming traffic inside Cincinnati because Singular has an operation or AT&T has an operation here and they get that roaming traffic.

So, typically our margin would be 3% to 4% to 5% lower than most wireless companies. And we'd expect to be able to grow that margin as we've all year long. In terms of the repurchase, we'll buy those shares thorough our 501(b) brand, okay and they will fall in the market, where they fall to be able to meet all the government regulations associated with that. Brian, you want to comment on data center build space and CapEx.

Brian Ross

Yeah the $19 million that you mentioned is what we still need to spend to complete the construction of the initial 3G overlay. In terms of data center capital, we will spend less than what we spent in 2007. The capacity that we are bringing online in '08 related to what we've been constructing in '07 is roughly in the neighborhood of about 50,000 square feet.

We'll also begin construction of another 50,000 square feet during 2008. Some of that capacity maybe available in ’08, but perhaps more likely than not that the bulk of that will come on in ’09. It takes about 10 to 12 months to complete the capacity build once you start.

Jack Cassidy

We'll be very much more efficient as we go forward in data center space. I've said on this call a number of times that this isn't the feel of dreams that if you build that they will come. We kind of sort of went there in Austin, Texas about five years ago, it didn't workout really well for us.

Our view is if you sell it, I'd build it. On the other hand you've to be able to take advantage of the robustness of the market and do not tell a customer that they are going to -- glad, we have your order, and it will take us 10 months to be able to build your center. So, you miss opportunities if you don't do that.

So, the 50,000 square feet that Brain is talking about is really go forward build space. But we'll be more efficient because we are going to purchase a building that we'll be able to takedown in chucks as opposed to purchase multiple sites on a go forward basis. So, that efficiency is only going to drive less CapEx and more margins

Dave Stoddle - JP Morgan

Great, I think that make sense. So, just to be clear the 50,000 that's kind of what's shown on slide 11 for the new capacity coming online for the first quarter, and then the 50,000 is kind of the remaining part that you're going to be adding some of that which will land in '08, some of that which in subsequent year?

Jack Cassidy

That's correct.

Dave Stoddle - JP Morgan

That's the way I've to think about it.

Jack Cassidy

Yeah.

Dave Stoddle - JP Morgan

Okay. And then just a follow-up on, you've $75 million of free cash flow left in '08 after the buyback. What are you thinking in terms of that cash I think you still need to pay the eGix transaction is that fully funded from cash coming out of the $75 million and even after that where does that capital go?

Jack Cassidy

Well let's be clear we said we'll buyback a $150 million over two years, okay until we do it this year or next year we said a $150 million over two years that's going to be dependent upon where the cards fall, okay.

Dave Stoddle - JP Morgan

Sure.

Jack Cassidy

I don't want you to take that, I mean, we're going to buyback a $150 million in the next six months. But we're trying to give ourselves every availability to be able to take advantage of whatever best suits the shareholders interest and what’s available, if there is bond repurchase, if there is share repurchase, if there is paying down debt whatever is the most opportunistic thing we think it's going to drive the best return to the shareholder that's where we want to be in the market.

Brian Ross

You're correct. The $20 million or $18 million that we're paying for eGix, we'll pay that here in the first quarter that will come out of the $150 million. And as Jack mentioned whatever we don’t spend on eGix or share repurchase we'll use to pay down debt and that could involve bank debt or could involve open market purchases depending upon what we think is the best value.

Dave Stoddle - JP Morgan

Perfect, thanks guys. I appreciate it.

Jack Cassidy

By the way would you tell Jonathan that not to be jealous about my comments about Simon, as being one of my best writer I like Jonathan too, as matter of fact, I'll read everybody's stuff.

Dave Stoddle - JP Morgan

I'll make sure to pass that along.

Jack Cassidy

Okay.

Operator

Thank you. Our next guest is Frank Louthan from Raymond James. Frank, your line is open.

Jason Patterson - Raymond James

Good morning. This is [Jason Patterson] in for Frank. There is a couple of quick questions. Obviously, it looked talk a little bit about the M&A outlook particularly on the data center side obviously you guys are making successful acquisitions there and whether you guys seeing out there in the marketplace now some more opportunities?

And secondly on the Godless cable hordes as competition started to reach a steady state and how pricing is irrational, just kind of thoughts on that. And is there any update on the potential video rollout? Thanks.

Jack Cassidy

Okay, Jason and please tell Frank, he's one of my favorite….

Jason Patterson - Raymond James

Absolutely.

Jack Cassidy

Okay. And by the way you talk really, really fast.

Jack Cassidy

I did that a lot, sorry.

Jack Cassidy

And while, we are in the Midwest, would you mind slowing it down so I can answer your questions. What was your first question?

Jason Patterson - Raymond James

Sure. The first one on the M&A outlook just the data center side particularly just what your thoughts on the marketplace? Are you seeing any more opportunities out there?

Jack Cassidy

Okay in that space. I'm sure there is, lots of opportunities okay. And we address opportunities as they come along and we've got our feelers out and we'll look at opportunities. But I think it's important not to get over your skies. And we've bitten off what we feel very comfortable in chewing and we're going to see how that goes and we really the eGix with the GramTel thing, we see those two businesses being very complimentary in other market strategy and also in the SMB space.

So, I didn't necessarily buy GramTel for -- so I'd say that I've got another 20,000 square feet of data center space. I bought them from a strategic viewpoint to be able to say, yes at a market I like that and yes, SMB I really, really like that has CBTS is mostly concerned about Fortune 500 enterprise space. I don't want to loose the market in the SMB space. So, data center opportunity in the M&A space is not necessarily around in and of itself a data center it has to be strategic to what it is that we are trying to accomplish across all of our markets.

Brian Ross

Yeah maybe if I can add one other thing to that Jack. The particular acquisition of GramTel, we thought it was very attractive based upon the price that we paid for it as well as the assets that we were getting.

As we've said that number of times on this call, we think that there is a change in the demand for space and that partly was feeling the demand in the marketplace that the space that customers are looking for requires more power and cooling and a lot of what comes on the market or a lot of which actually having inventory having across the country is space that really can't meet the power and cooling requirements that current customer demand is looking for. So, we really saw this as a somewhat unique opportunity both in terms of price, assets and quite frankly the management that we've there.

Jack Cassidy

Yeah, I think that's important and I hope Tracy Graham from GramTel is listening. What we do here in M&A given our limited resources we are buying the jockey not the horse. Okay, we really think that the management teams of both eGix and GramTel are going to be able to make us work harder and smarter here and we think we are going to add value to those guys. So, again it's more about the jockey than it is the horse.

Jason Patterson - Raymond James

Great color, thanks.

Jack Cassidy

Okay.

Brian Ross

Did you have other questions?

Jason Patterson - Raymond James

I do. Just on the cable side as soon as it reached the steady rate kind of equilibrium in the markets and do you guys have any update on the potential IPTV rollout that will be great? Thanks.

Jack Cassidy

Well, I wish we've reached the steady state in terms of pricing and the great battles between telecom and cable. We haven't seen it. They are incredibly promotional. As much money, as they spent in the third quarter, they must have double down in the fourth quarter, so and we had insight rollout. So, look, I mean, again they are competitors it's a war and we've joined in that battle.

So, I don’t see that thing becoming any less competitive in '08 than I saw it in ’07. In terms of sanity, one mans insanity is another man sanity. So, I really can't say what's going to happen in that market pricing. All I know is that if your stuff works better than anybody else's and you provide your customers with an outstanding price value relationship and you continue to win things like the J.D. Power awards we won.

We continue to be according to our PUC old Chairman the on a per capita basis for all utilities across United States the least complaint per customer out there if you continue to provide a bundles that offer interoperable solutions back and forth that you, yes, you are going to loose customers in the short-term and that you're going to gain them back or you're going to win new customers in other space or so.

Again this is a NASCAR race without a flag. You are just, you are in it for a long, long, long time and you've to be sensible with where you think that markets going then you got to (inaudible) but plan potatoes, I mean you got to fight it out in that market, but you got to grow the other parts of your business and that’s' a unique advantage that we have we continue to be the only telecom company in these United States that has wireless, wireline, long distance and broadband in the consumer space. And with those tools in that bundle we think that we can provide our customer an outstanding value.

But ultimately you've got to be in the entertainment space, which I think was kind of your follow-on question there and although I have nothing to new to announce. We continue to look at that market, as you know, we bought the Lebanon cable company. And we've assets that other Telco's don't have in terms of both buying content much cheaper than the IPTV guys are and also haven’t had hands in distribution availability. But I don't have anything new to announce in terms of any build.

Jason Patterson - Raymond James

Great, thank you. I'll be happy to pass your compliments along to Frank.

Jack Cassidy

Please do.

Operator

Thank you. Our final question comes from the Gaurav Jaitly with UBS. Your line is open.

Gaurav Jaitly - UBS

Great, thanks. Good morning guys. Just a follow-up on that out-of-region question. First, just from a housekeeping perspective how much EBITDA and free cash flow do you expect from the eGix and GramTel acquisition in 2008? And then just broadly on your strategy there, you obviously own some wireless spectrum in Indiana as well, you made these two acquisitions, you talked in the past about building a CELEC around data center asset? Is that 50,000 square feet that you are going to building out in 2008, is that in the ILEC footprint or is that in Indiana, if you just talk little bit about that? And just in general for the strategy in out-of-region, how you expect to expand that will be great? Thank you.

Brian Ross

Thanks, Gaurav. The EBITDA and cash flow of these businesses is relatively modest and it's included in our guidance. And we're not going to break that out right now. But let me say that they are both accretive from an EBITDA perspective. And the cash, the cash as you might suspect these businesses are growing, so cash would not be, they would not be cash generators. But they are small enough that they would not be using large amounts of cash, as our guidance indicates.

Our out-of-territory regions, our out-of-territory strategy is really pretty simple. We went to Dayton first with our wireless business and then once we build that business, we add another products to that marketplace to where we really a full service provider in Dayton and in the northern border communities outside of our ILEC territory.

We see opportunity -- we saw opportunity in Indiana with these companies' eGix and GramTel, both of these companies are serving business customers. So, we are not talking about a consumer play here. And we are going to, as Jack said we've moved into these areas. We've bidden-off a couple of acquisitions that we think we can assimilate into our company and we are going to see how it goes. And if there are other services that would make sense to sell these customers or assets there that would make sense to serve other customer segments such as consumer that may occur, but that would be downstream.

Gaurav Jaitly - UBS

And just, is that data center build is that in your ILEC footprint, the 50,000 square feet, are you building that out?

Jack Cassidy

Yes that would be inside our ILEC footprint.

Gaurav Jaitly - UBS

Okay, great. Thanks guys. Congratulations on a great quarter.

Brian Ross

Thank you very much.

Operator

Thank you. I'll turn the call back over to Ms. Bolte.

Traci Bolte

Well that concludes the call for today. Thanks for joining us and see you next quarter.

Operator

That concludes today's conference. Thank you for participating. You may now disconnect.

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