Cincinnati Bell Inc. Q1 2008 Earnings Call Transcript

May.20.08 | About: Cincinnati Bell (CBB)

Cincinnati Bell Inc. (NYSE:CBB)

Q1 2008 Earnings Call

April 30, 2008 10:00 am ET


Traci Bolte - Vice President of Investor Relations and Corporate Communications

John F. Cassidy - President and Chief Executive Officer

Brian A. Ross - Chief Financial Officer


David Barden - Bank of America

Simon Flannery - Morgan Stanley

Ana Goshko - Banc of America

Frank Louthan - Raymond James

Susan Lee - Credit Suisse

Gaurav Jaitly – UBS

David [Sharat] - Lehman Brothers


Welcome to Cincinnati Bell’s first quarter earnings conference call for 2008. Your host for today’s conference will be Traci Bolte. (Operator Instructions) I would now like to turn the conference over to your host, Ms. Bolte.

Traci Bolte

I’d like to welcome everyone to Cincinnati Bell’s first quarter earnings call. With me on the call today are President and Chief Executive Officer, Jack Cassidy and Chief Financial Officer, Brian Ross. This morning you will hear from Jack about first quarter 2008 results followed by Brian’s comments on first quarter operational metrics and segment financials.

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 statements. 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 believe, anticipate, plan, intend, expect, 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 and Exchange Commission, including Cincinnati Bell’s annual Form 10-K report, quarterly Form 10-Q report, and Form 8-K report.

This presentation also contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measure are also on our website. The forward-looking statements made on this conference call represent the company’s estimates as of April 30, 2008. The company anticipates that subsequent events and developments will cause its estimates to change.

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

John F. Cassidy

We very much appreciate you joining us today. The first quarter results again demonstrated Cincinnati Bell’s continued progress in many areas including growth in data centers, wireless and DSL, particularly in the enterprise space. In total the company’s quarterly revenue increased a full 11% year-over-year.

EBITDA improved by 2.5% and earnings per share excluding special items was up $0.10 or 22% up from a year ago. We also began purchasing Cincinnati Bell shares as announced with the Board approved $150 million share repurchase program in February. Brian will provide further information about the buyback later on in the call.

Let me begin by focusing on the results that reflect our continued emphasis on Wireless data revenue, data centers and business customers in general. First, we continue to leverage our superior network quality and innovative rate plans to strengthen and grow the Wireless business.

Wireless revenues in fact for the first quarter was up $79 million, up 15% from a year ago, and EBITDA margin expanded to 28%, an increase of three points from the first quarter of 2007. Secondly, DSL subscriber growth of 10% over last year helped drive an 8% increase in Wireline date revenue which also includes data transport. We believe that Cincinnati Bell’s continued subscriber growth in a highly penetrated DSL market speaks to the quality of our service and indeed the price value relationship with our customers.

Turning to Technology Solutions our data center investments have resulted in growth and improved returns across the entire segment. Revenue grew a full 54% year-over-year due to growth in all areas of the business and EBITDA increased by 76% compared to a year ago. Data center capacity increased by 26% to 182,000 square feet from year-end. In addition 21,000 square feet began billing in this quarter.

Let me take a few minutes to review the key drivers of revenue growth. As you can see on Slide 6 of the presentation quarterly revenue totaled $349 million, up from $315 million a year ago. Revenue from the Technology Solutions segment increased $26 million from the first quarter of 2007 due primarily to the growth in telecom and IT equipment of 53% and 51% in data center and managed services.

Wireless quarterly revenue grew by $10 million or 15% on the strength of the 16% increase in service revenue driven primarily mostly by 8% growth in postpaid subs and higher ARPU. In addition, DSL and data transport revenue was up 8% and long distance and VoIP revenue grew by 30%.

Revenue growth help deliver quarterly EBITDA of $120 million, up 2.5% year-over-year. As shown on Slide 7, wireless EBITDA increased 30% while Technology Solutions was up 76%. Our ability to generate this growth in Wireless and Technology Solutions more than offset a decline in Wireline EBITDA. As a result, net income excluding special items increased 19% to $27 million or $0.10 per share compared with $0.08 in the first quarter of 2007.

Special items in the quarter included a $24 million pre-tax restructuring charge as a result of a voluntary early retirement offer included in our recently completed labor agreement which was ratified by the employees represented by the Communication Workers of America. We believe that initiatives such as the voluntary ERO are essential to improving our future cost structure and keeping expenses in line with anticipated revenue across the company.

By focusing on growth of Wireless, Wireline data and Technology Solutions we have further diversified our revenue mix. In the first quarter, 85% of total revenue came from areas other than traditional wireline voice compared to 81% in the first quarter of 2007. This product diversification is driving higher profits.

As you can see on Slide 10, the growth segments of Wireless and Technologies Solutions are also becoming a larger percentage of total EBITDA. In the first quarter of 2008, these segments represented 24% of total EBITDA as compared to 18% of a year ago.

In addition to product diversification we remained focused on diversifying revenue between business and consumers. Revenue from the business customers grew by 20% year-over-year and business access lines were actually up 1.5%. As a result business markets revenue accounted for 59% of total first quarter revenue. A key factor in achieving business revenue growth is the investment in data centers and managed services and our belief that this represents the foundation for the ultimate business bundle.

In the first quarter, we completed construction of 38,000 square feet of new raised floor space which brought total billable capacity to 182,000 feet including 13,000 square feet of GramTel data center capacity. The utilization rate equaled 85% at the end of the quarter leaving 27,000 square feet of inventory. Presently essentially all of this inventory plus an additional 7,000 square feet that has been under construction in Cincinnati is under final contract negotiations or is otherwise committed to customers.

In total we have 66,000 square feet of capacity in design or under construction here at the end of the first quarter. On our fourth quarter call last year, we announced plans to build out 50,000 square feet of additional data center capacity. This is an engineering design at present. It will likely not come online in our newly acquired Lebanon, Ohio facility until early of 2009.

Another 9,000 square feet of capacity came online in April related to the GramTel acquisition and an additional 7,000 square feet in Cincinnati will be commissioned in the second quarter. Data center demand continues to be very strong and we expect to fill the increased capacity as it becomes available.

As I mentioned earlier Cincinnati Bell’s product diversification is a key component in increased profitability. Contributing to the quarter success in this area are Cincinnati Bell Wireless and ZoomTown high-speed Internet service both of which are celebrating their 10th anniversary as Cincinnati Bell offerings. Over these past ten years we have seen tremendous technological advance and increasingly competitive landscape in wireless and broadband.

Despite this competitive landscape, I am proud to say that Cincinnati Bell Wireless and ZoomTown remained number one in their markets. Today these operations provide superior value and network reliability to more than 800,000 subscribers in greater Cincinnati and Dayton.

Over the next year we will launch our 3G wireless network, allowing us to deliver a better customer experience while reducing further network capital costs. The 3G offering is just one advancement we have identified. We’ve recognized the need to stay current in our offerings in this category and are committed to being at the forefront of our customers’ needs.

In closing then, we are pleased with Cincinnati Bell’s first quarter results which marked the tenth straight quarter of year-over-year revenue growth and the seventh straight quarter of EBTIDA growth. The ability to achieve this consistent growth pattern in a very challenging telecom environment speaks to the successful execution of Cincinnati Bell’s strategy as well as to the dedication and hard work of its employees.

Now, I’d like to turn the call over to Brian Ross, our Chief Financial Officer, who will provide additional detail and insight into our performance.

Brian A. Ross

As you have just heard double-digit growth in both Wireless and Technology Solutions drove the continued positive trends in total revenue and EBITDA. In my comments, I will focus on both operational and segment performance, the restructure charge, related cost reductions and then close with the balance sheet and cash flow.

Beginning with Wireless, total segment revenue increased $10 million or 15% to $79 million. Segment EBITDA increased $5 million or 30% to total $22 million compared to the first quarter of 2007. This resulted in year-over-year and sequential EBITDA margin expansion of three points to 28%.

As depicted on Slide 17, $4 million of margin growth came from expanded service revenue and supply chain efficiencies along with $1 million of lower acquisition costs related to fewer gross adds in the quarter. This quarter brings us closer to our goal to expand EBITDA margins to 30%.

As noted in Slide 18, an 8% postpaid subscriber increase and 6% ARPU growth drove postpaid service revenue 15% higher compared to the first quarter of 2007. Postpaid churn of 1.56% compared favorably with 1.59% in the fourth quarter of 2007. Postpaid net activations in the quarter totaled 4,000, consistent with fourth quarter 2007’s 9,000 net activations. Postpaid gross activations had seasonally declined fourth quarter to first quarter an average of 5,000 for the preceding five years. Gross activations were slightly below first quarter of last year.

Smartphone adoption remains brisk, rising 72% year-over-year to an 8% penetration at the end of first quarter. This focus has helped drive postpaid ARPU to $47, up 6% year-over-year and 3% sequentially. Year-over-year data ARPU grew 34% to $7.56 which is almost 16% of total ARPU. This is on the strength of SMS and BlackBerry subscription growth and higher pay for use. Data revenue continues to be a growth opportunity for our wireless business.

As illustrated on Slide 19, prepaid service revenue grew 20% to $14 million mostly on the strength of higher data plan subscription. Prepaid ARPU in the first quarter was $26, up 17% year-over-year and $0.07 from the fourth quarter of 2007. Data is now 29% of total prepaid ARPU, up 24% a year ago. Prepaid net adds in the quarter were 4,000. We are pleased with this amount as our prepaid focus is oriented on ARPU and profitability.

Turning to the Technology Solutions segment and Slide 20 in the presentation, revenue increased 54% year-over-year driven by strong telecom and IT equipment growth. Gross profit expanded $6 million or 59%, mostly related to this telecom and IT equipment revenue growth and 69,000 square feet of newly commissioned at billing data center capacity since March 2007.

EBITDA grew 76% from a year ago. In the Wireline segment and on Slide 22, EBITDA was $96 million in the first quarter, down $4 million from the prior year. A combination of higher data and long distance revenue less $5 million of increased direct volume related “off-net” expenses and $2 million of decreased labor expenses partially offset the $12 million of decreased voice revenue.

We continue to be pleased with the success of our expansion markets, where we offer a full service bundle to consumers and our complete range of business services. Revenue in the CLEC increased $3 million compared to the first quarter of 2007 and on a 22% increase in access lines, and continued growth in the DSL subscriber base.

Moving on to Slide 24, total DSL subscribers increased to 228,000 which was up 10% compared to a year ago. Penetration of Cincinnati Bell’s consumer and territory primary access lines reached 44%. DSL churn remained well below 2% and was even with a year ago. Access lines declined by 6.3% to 821,000. Expansion market lines grew 22% to total 64,000 which is now 8% of total lines. In-territory access line decline was 8.1%.

As you can see on Slide 25, net losses were 16,000 which is a 1000 line improvement from the fourth quarter and 1000 more from the first quarter of 2007. Churn remained well below 2% and gross adds remained approximately 20,000.

We are not pleased by these results, are in the process of revitalizing our marketing efforts. As a first step, we have hired a new advertising agency, the WonderGroup, based here in Cincinnati. We are excited about this new relationship and anticipate improved results.

Although we remain committed to improving our access line losses, we are endeavoring to align the future cost structure of our Wireline business to an expected lower revenue base. In the quarter we’ve recorded a $24 million restructuring charge to improve our cost structure.

As you can see on Slide 26, the charge includes $23 million, a special termination benefit, which 284 union employees have elected to receive in return for an early retirement which will occur between now and the end of 2010. When you combine this charge with the fourth quarter charge from last year and include additional related amounts to be recognized over the next two years, we will have recognized $68 million of expense of which $21 million is accelerated pension and post retirement expense that we would have recognized in later periods.

The $47 million that remain represents additional expense which we have already partially refunded with the $20 million fourth quarter 2007 accelerated pension contribution and for which we will fund the balance with $25 to $30 million of future pension contributions and severance payments to be made over the next seven years.

With this charge we expect to drive $45 million of annual expense savings by the year 2010. The initiatives that we are implementing are various and include further productivity improvements and outsourcing initiatives as well as slower rates of union wage increases and a two-tier wage structure applicable to new hires.

Switching gears to the balance sheet and cash flow items, capital expenditures in the quarter equaled $61 million, a year-over-year increase of $19 million. This increase was mostly related to 3G spending in Wireless and data center spending at Technology Solutions. In the quarter we purchased a building in Lebanon, Ohio for $16 million and which can support approximately 100,000 square feet of future data center expansion.

In our Wireless business, we are continuing forward progress with the launch of our 3G network in August of this year. In anticipation of the launch we have begun selling 3G devices to our subscriber base by featuring the Nokia 3555 in conjunction with our Cincinnati Reds sponsorship.

While the device does not take full advantage of the data capabilities of the network, it will continue to offload incremental voice minutes from GSM to the more efficient 3G network. Subscriber uptake during the quarter on 3G capable devices is exceeding our forecasts and we anticipate a very successful 3G launch.

Moving now to Slide 29 and free cash flow, which equaled $24 million in the quarter an increase of $2 million from a year ago. The second of two $21.5 million data center customer prepayments essentially offset $9 million of increased capital expenditures.

Slide 30 illustrates how we deployed our available financial resources during the first quarter to buy shares to retire discounted notes and to fund our acquisition activity. We closed the eGIX acquisition for $18 million, bought back 4.1 million shares of common stock for an approximate $17 million and retired $40 million of our 8-3/8% notes at a $2 million discount to par.

In summary we are very pleased with the financial performance of our business in the quarter and are optimistic about the outlook for the remainder of the year. We are reaffirming the guidance we provided in February.

Now I’ll turn the program back over to Traci.

Traci Bolte

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

Question-and-Answer Session


(Operator Instructions) Your first question comes from David Barden - Bank of America.

David Barden - Bank of America

Brian, the restructuring question, it got a little complex there. You had a certain amount of restructuring last quarter and then an incremental amount this quarter which is related to retirement that are going span through 2010, And I think your point was you’re going to take this charge in the second quarter but that there is no net incremental savings beyond what was guided to.

But if you could revisit that topic that would be helpful. And then obviously we have to ask the obligatory question on the economic forces at work and how you saw them playing out versus prepaid and postpaid in Wireless and then obviously in Wireline and broadband churn where it wasn’t obvious there was much there, but any commentary there will be helpful.

Brian A. Ross

We, the $24 million we took in the quarter the bulk of that represents the special termination benefit that our union agreed to in the contract that we consummated in the quarter. To some extent we had anticipated some of this expense in the fourth quarter. Whether we were going to have this as a special termination benefit or as severance or other cost reductions, we had reflected that in the fourth quarter. So there was a little bit of a shifting of that amount.

The savings that we expect in 2008 are already built in our guidance although the charge itself is really designed to reduce costs over a three-year period which is the $45 million that we put in the presentation.

David Barden - Bank of America

So is it fair to say that, I can see how the severance was $23 last quarter. You reversed out $14 of that, some of that gets rolled into the retirement charge and then if you’re saying $45 million of savings over the three years, $15 million of that on a proportional basis for the rest of the year would be presumably what’s coming out of this year’s expenses related to that charge?

Brian A. Ross

Not necessarily, the $45 million is the total annual savings by the end of the time period.

David Barden - Bank of America

A run rate up to the point where all those people have retired in 2010?

Brian A. Ross

That’s right and all the other initiatives that we have in this time horizon will be completed.

John F. Cassidy

So David, those both management and union people will be coming out this year and over the course of the following year as well. So the savings will roll through obviously after the people have actually left the payroll.

On the question of the economy, I don’t want to say that the economy is not affecting how people purchase things because clearly it is. I think there is belt tightening going on although again our unemployment rate, our bad debt rate, our accounts receivable are all in line and closely watched.

Whether you talk to someone in the neighborhood or whether you read the newspaper you can’t help but by affected by the fact that consumer confidence is down. How that flows through to buying decisions I think is because of the individual themselves here in Cincinnati is not necessarily affected. They see dark clouds on the horizon so then they begin the belt tightening which in fact leads to, I think, behavior where people want to buy more and pay less.

And certainly the bundle that we provide goes to that and I think we picked up our fair share. Also our no contract policy in Wireless I think gives people the surety that they could buy in and do other things later if that’s what they need. So I think the price value relationship that we provide in the consumer market is actually helped during times of people thinking very clearly about what it is they’re buying and how much they’re paying for it.

And then moving to the enterprise side, I think that’s also true, the carryover is that enterprise customers, and Cincinnati is blessed to have many large ones, are re-looking their productivity measures and trying to squeeze more out of the rock. And we think that that really helps us in driving data center decisions as we are able to clearly show efficiencies in that world.

And then you see that our access lines actually increased in the enterprise space as those companies are looking to get more productive in business and avoid market turmoil as well. So we haven’t seen any financial indicators that would indicate that a tsunami is on us and in terms of consumer and business confidence. Yet I think it’s clearly out there and we have to be aware of that and the message has to be our stuff works better than anybody else and it’s at a greater price value relationship.

David Barden - Bank of America

Jack just to follow-up you say you’re specifically citing that the data center opportunity is at least as good if not better because the enterprises are looking at this as a productivity enhancement tool?

John F. Cassidy

I think it’s better because clearly when a company has to think about a new data center because they don’t have enough space or they don’t have enough electricity or power to get in. It’s a classic make versus buy decision. Typically in the past CIOs have wanted data centers in their own buildings.

Now I think they are looking at it as this is not a core competency and if a company who has got the premier group of companies that we have in our data centers can do it better, more efficiently, and by the way cheaper, then yes I think that increases our opportunities.


Your next question comes from Simon Flannery - Morgan Stanley.

Simon Flannery - Morgan Stanley

On the data center topic, perhaps Jack you could talk about pricing trends. Are you able to benefit from the demand to continue to stable or even improve pricing over time? And talking about the building that you purchased in Lebanon, I think you said 100,000 square feet.

I just wanted to square that with the 50,000 square feet you are turning on in ‘09. Is this 100 incremental to that or is that, is there 50,000 that it could be built as later in ‘09, 2010 and are you looking at potentially other building purchases to continue to build on this opportunity?

John F. Cassidy

As far as pricing goes, pricing is stable and again I want to differentiate between what a Cincinnati Bell data center is and what the industry may view as data centers. If you look at us, we’re basically in the 15-year contracts. We’re basically in the Fortune 500 companies. We really don’t sell by the square foot in terms of a rack or a small square footage.

So, as we look at pricing we look at our pricing probably different than most of you because we are into selling 5 to 10 to 50,000 square feet as opposed to selling by the rack or by the bit. So pricing is very much stable.

In the building, the building that we have bought was the old Fujitec Elevator Building in Lebanon which is comprised of 300,000 square feet, 100,000 square feet of which is basically office space. That leaves 200,000 square feet available to take down in chunks as demand for the data centers grow, which would make us a lot more efficient than building or buying new buildings in the 50,000 square foot range.

So when you look at our guidance on 50,000 square feet, that’s going to go into this facility. It’ll be the first 50,000 chunk to be taken down and obviously that’ll leave us three more 50,000 chunks to be taken down after that.

Simon Flannery - Morgan Stanley

And how do you think about beyond the first 50, will you think something about that before the end of this year. Have you got a decision to make or?

John F. Cassidy

Well that’s of course very much functional with customer demand and as has been our mantra over time that this isn’t the field of dreams. It’s not if you build that they will come. What we look at is if you sell it then we’ll build it. So when we look at what we feel the customer demand is will depend on when we take down incremental chunks.

So if a customer comes to us and says I want to take down another 50,000 or if I want to move my facility, the facility is very efficient because it’s already there. It’s already got the power, it’s already got the generators, it’s already got the chillers, and it’s already got the electrical capacity. By the way in this center there are two competing power companies in both AEP and Duke which gives a better variable cost ratio to whoever is going into the center.

So, it really depends, Simon, on customer demand given the economics as I’ve told you and others that we are looking for a particular return on investment. If we achieve that then we will spend any amount of capital to be able to build out into that facility. I told you 300,000 square feet with 100,000 square feet of office space. And of course you need space inside the incremental 200 to be able to put your generators and your power, so it’s probably not exactly along that line.

But again the thought process that we had and John Burns who leads this organization for us was it is going to be more and more inefficient to buy more and more buildings at 50,000 square foot of capacity. This building came on. It’s got 7-inch concrete reinforced walls. It’s in a great location on a fiber loop in Butler County. It’s got competing energy companies and it was absolutely the right building at the right time.

We’d have probably taken a pass on it a year and a half, two years ago. But given the demand that we see and given the efficiencies created by having more into one building, this was outstanding opportunity for us.


Your next question comes from Ana Goshko - Banc of America.

Ana Goshko - Banc of America

Brian I just wanted to revisit the cash flow for the rest of the year. So you’re comfortable with the $150 million guidance, you achieved $24 in the quarter which basically is about 126 of discretionary. Is there anything, any commitments or final acquisitions that I’m forgetting about that you are committed to in terms of the use of that cash flow or is that largely discretionary for de-levering and share buyback?

Brian A. Ross

Yes, we are comfortable about the number for the year. If you remember, Ana, that we pay the majority of our bond interest in Q1 and Q3. So in that number we had approximately $60 million of payments in the first quarter, total interest payments. That number in the second quarter likely will be somewhere in the $15 to $20 million range. So you can see that free cash flow jumps in second and fourth quarter as a result of those lower payments.

Regarding committed acquisitions, we have a small acquisition where we are buying some assets in Dayton, Ohio that further completes some of our fiber assets in that region, but that’s a very small number, that’s like $1.5 million.

Brian A. Ross

It’s from CenturyTel, so aside from that, no there are no committed acquisitions.

Ana Goshko - Banc of America

On the bond buyback, it’s great to see you taking advantage of the down draft in the markets to buy at a discount. I was surprised a bit that you went after the 8-3/8% because on my understanding is those are a hit against your restricted payments basket and some of your debt.

So I just wanted an update on either in your credit facility or in the 7¼%, what’s your tightest constraint now on your RP? And is that any constraint on the potential for the share buybacks you might be able to do this year?

Brian A. Ross

We see no real constraint related to the share buyback, either this year or next year related to these purchases. We feel we have plenty of room now and through the buyback period.

Ana Goshko - Banc of America

On the increase in the credit facility in the quarter, of the $45 million, is that something that you plan to pay down? Was that a temporary draw or is that something you feel comfortable keeping at that level?

Brian A. Ross

We will evaluate that over the course of the year. I think we are comfortable keeping it at that level, although we certainly with the free cash flow that will come through the balance of the year have the opportunity to pay that down. As you said, earlier Ana we thought that the values in the marketplace were quite good in the quarter and we thought it made sense to go ahead and buy what we thought was a comfortable amount to buy with the use of the credit facility.

And if, just based upon the interest differential alone, that drives about 300 basis point savings in pre-tax interest which is about a little over $1 million a year. So, we thought it was economic and a prudent thing to do.


Your next question comes from Frank Louthan - Raymond James.

Frank Louthan - Raymond James

Can you give us an idea on looking at the wireless side the prepaid was little higher mix than we were looking for? Are you seeing any shift in demand there Jack to some of your comments on maybe the purchasing decisions? Do you expect that to maybe to be a little bit higher mix going forward?

And then can you give us an idea of how aggressively you’re selling the data center business out of region? Do you have salespeople calling outside of the Cincinnati area on larger companies? Just give us an idea of the progress of the sales process to companies on a national basis.

John F. Cassidy

On the mix on prepaid, I never met a profitable customer I didn’t like. And we continue to see prepaid acceleration, but truthfully we’d look at those businesses almost as being separate. They’re prepaid and the postpaid business. And as Brian mentioned to you earlier our data revenue in the prepaid business is growing nicely. When we attract a prepaid customer we do it at a very low cost per gross activation. We really don’t advertise the business all that much. It’s based on the strength of the distribution.

And frankly we don’t see churn out of our postpaid business and into prepaid, that clearly doesn’t happen. However, that growth in that business is coming from T-Mobile customers, it’s coming from Cricket customers and it’s coming from Sprint or lower end customers, which we’re more than happy to have come over to our prepaid business.

So go forward the mix I think in a world that is as penetrated as it is with postpaid wireless I think that the mix will, by the nature of the customer coming into the market the mix will probably shift a couple of percentage points to prepaid just given who the customer is and their economics. But I see those prepaid customers ultimately going into the postpaid markets. So it’s hard to judge with any accuracy what’s going on there. Clearly a sudden shift in the economy to the downside would, I think, drive your prepaid business as people go out of postpaid business into that.

In terms of the sales effort in the data centers, we really don’t have feet on the street in LA or Detroit or Atlanta going after data center opportunities. However given our favorable mix of data centers both from a redundancy and a mirroring viewpoint to a primary facility and given the names of the customers that we have as Fortune 500 companies inside the data centers, many, many, many out of town and in fact international companies have come to us looking at available space.

And given that, there are some names of companies that are not headquartered inside Cincinnati, yet they are Fortune 500 companies and from a geographical standpoint again diverse to Cincinnati. So we don’t chase outer market opportunities but increasingly more and more and more out of town and in fact international customers have come to us.

Number one, based upon the fact of who is currently in our centers. Number two, the fact that it is, we are geographically located in a place that’s relatively separate from large calamities in terms of national defense and weather related issues.

And thirdly, because they can get with the centers that we have, you can get given the length of the fiber route, you can get instantaneous backup and feedback on redundancy if anything goes down. So it’s one of the few places in the country and in fact in the world where you can be in two disparate facilities and get instantaneous backup for your data. So that’s becoming an attraction as well.

Frank Louthan - Raymond James

Why wouldn’t you be a little bit more aggressive or maybe enlisted some sales agents or somebody that you could use? I’m inferring from your comments that your pipeline of sales and the backlog continue to expand and you’re very comfortable with that at this point. Maybe you don’t see a need to, but maybe give us an idea on how your backlog of signed contracts has trended over the last twelve months and what the pipeline of new opportunities looks like?

John F. Cassidy

The backlog of the relationships on the contracts is as good or better than it has ever been and the timing of the planning, the building and the arrival of the customer into the center is very much on track with our plans. Frank as we’ve discussed, as I’ve discussed with others, we don’t view ourselves as a SAVVIS or an Equinex in terms of again we only deal with Fortune 500 companies, we only deal with 15-year contracts and we only deal with a very tight payback windows on the ROI.

The thing that you would not look for us to do is to open up a facility or a sales office in say Atlanta unless we had a customer there in excess space. It’s just not what it is that we do. We service the customers that we have. We go to the geographic areas that they require us to go to. If that creates additional opportunity then we sell that space but it’s really not in our plan to go open up 100,000 square foot in Tampa and then try to go sell those.

And in part that’s the reason why the sales force isn’t out there trying to sell geographically diverse centers because the customer wouldn’t actually ask where is the center let me take a tour, and you’d say well if you buy it, then I’ll build it for you and obviously that’s not a good thing for the sales cycle.

So if they want to come to Cincinnati, we can provide great space here and if they want us to build in geographically diverse areas we would do that. But our sales model and plan and there in fact our capital and build plan would not mirror some of the more typical data center companies that are out there.


Your next question comes from Susan Lee - Credit Suisse.

Susan Lee - Credit Suisse

On the wireline side, ILEC line losses of about 8.1% and then sounds like it’s higher than you expected. Can you just talk about the trend line for the remainder of the year there?

And then also just on the wireless side, postpaid gross adds I think you commented there as well being weaker than you expected. If you could comment just on trends that you’re seeing there, whether it would be increased competition or whatnot. And then just lastly on the balance sheet can you just refresh my memory on what the RP basket is for the 7¼% are now?

Brian A. Ross

Susan, I’ll start off with the RP basket. It’s over $100 million and as we’ve said before we feel that it’s very, we’re very comfortable with our space on that now and over time.

John F. Cassidy

Then on the Wireline and the Wireless results Susan, I don’t know where you’ve got the fact that it was weaker than we thought it was going to be. What Brian said is we are clearly not happy in the consumer space with the trending in that. That said, I think our trends are in line with most of the companies that have reported and we’ll see what happens in the pure RLEC world.

Look, the wireline thing, it’s a battle out there, and between cable competition and wireless displacement, I can’t talk to the trends that are going to continue. Until proven otherwise, I wouldn’t expect trends are going to be any different than what you currently see.

In terms of wireless, I know you analysts want to look at the difference between postpaid and prepaid and all that. But from my viewpoint, I look at customers and the profitability that they are giving to me. Clearly, we would all like to have better results. Even if they were outstanding results we’d like them to be more better outstanding results.

But I think they are basically in line with not only our expectations but also performance in the industry. One of the things that we’ve been trying to say on this call and tried to say today is that you can trust in God but you’ve got to plant potatoes.

That trend may be different, however if you look at the revenue mix business to consumer, if you look at the revenue and profitability mix wireline versus wireless versus data centers, we would expect that the consumer market will at some point settle down. But there is a reason why our profits and our revenues are growing as compared to our peer group, and that is because of diversification and planning to be able to get those things done.


Your next question comes from Gaurav Jaitly - UBS.

Gaurav Jaitly - UBS

On the Technology Solutions, I was just hoping to get a little more color on your seasonality comment, Brian. I was surprised to see the EBITDA decline. I know you talked about seasonality but you had a pretty significant increase in available data center space over the past couple of quarters. Yet EBITDA which is I think it’s your most highly profitable segment in that segment there and yet to see EBITDA decline $3 million sequentially and actually be below third quarter levels.

And then on the wireless side, nice to see the ARPU growth there and the margin expansion. I was hoping to get some color on what percentage of your total subs are data subs right now and what the ARPU is there.

Brian A. Ross

Let me start with the seasonality question. The hardware component of this business, Technology Solutions, is relatively significant. If you look at the total revenue, it’s more than half of the total revenue comes from hardware. So the profitability of the segment is affected by the fluctuation of that hardware business, which is not recurring and it tends to be driven by customer budgets as well as the fiscal years of the manufacturers and those happen to be typically Q2 and Q4.

So as a result Q1 and Q3 tend to be lower quarters and Q1 tends to be the lowest of the four. So we were actually quite pleased with the quarter due to the hardware sales that we did have and we fully expected the quarter to be less than the second through fourth quarters of the prior year. So we are not at all unhappy about where we are in that seasonality and would expect to see further growth on a year-over-year basis.

Gaurav Jaitly - UBS

Brian can you just remind us again what the margins are on those three line items in that segment, approximate margins?

Brian A. Ross

Yes, approximate gross margins on hardware is in the hardware distribution business which include services on the hardware is in the 10% to 20% range as well as the professional service line of business which is the smaller of the three and there we are providing essentially labor services to our customer base. And then the data center and managed services segment the gross margin there has been climbing and that’s in the high to low 30% range.

John F. Cassidy

Gaurav, no matter how much you try we are not going to feel bad about growing EBITDA 76% on a year-over-year basis in this competitive world. I think that EBITDA being up 76% year-over-year and being on a sequential basis being relatively flat to down should give you then the opportunity to understand that the equipment margin that Brian just spoke about is going cause fluctuations in the business.

However the margin from the data centers as square footage comes online and gets sold is very stable and very solid and in 10 to 15 year contracts. So it’s going to fluctuate quarter-to-quarter, I can’t feel bad about growing that 76% year-over-year.

Gaurav Jaitly - UBS

And on the wireless side, just in terms of what percentage of your subs are on data contracts and what ARPU there is?

Brian A. Ross

Yes, first of all we obviously don’t necessarily force a customer to have a contract but we have about just in the neighborhood of about 330,000 of our subs have data plans. So, that breaks out about 50% of the postpaid customers have a data plan and over 50% of the prepaid do. And the ARPU is around $7.50, is our data ARPU in postpaid and prepaid it’s a little bit higher than that.


Your last question comes from David [Sharat] - Lehman Brothers.

David [Sharat] - Lehman Brothers

Jack I was wondering if I could ask about cable competition on the business side and you’ve talked about consumer a lot on the call. The cable companies and Time Warner Cable in particular has talked about their focus on the commercial opportunity over the last few months and then again on their call this morning.

Just what you are actually seeing on the ground in terms of them either hiring sales people, advertising more, just seeing them in competitive bids. And as we look forward to ‘08 your access line trends in business have been very stable over the last few years, if we should expect maybe to see similar impact from that launch this year?

John F. Cassidy

I see lots of billboards. I see lots of free advertising that they get on their cable channel. I see lots of TV ads and I see our access lines growing in the quarter. So it’s not to diminish the fact that I think that they are competitors and that they are good. I think that a business looks differently however at moving lines as opposed to a consumer.

Consumer moves into a new house and the cable company calls and says how about getting voice over me and by the way I might be cheaper and I think that’s easier. An SMB or an enterprise business is going to look at that and say okay, well, I don’t have wireless as a backup. I do need connectivity for voice. Cincinnati Bell is the largest provider of VoIP in the city of Cincinnati; we just choose to provide it to business customers.

You can get circuit, you can VoIP, and you can get LAN. And then the business customer says okay Mr. Cable Company show me what your technology department looks like, show me your new products, show me that I can get fixed at two o’clock in the morning on Sunday if my lines go down. That’s a much bigger decision for a business customer to make than a consumer. And I think competition always makes everybody better. I would tell you that our access lines increased in the face of more and more and more advertising.

Traci Bolte

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

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