Cincinnati Bell Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: Cincinnati Bell (CBB)

Cincinnati Bell (NYSE:CBB)

Q3 2012 Earnings Call

October 30, 2012 10:00 am ET


Kurt A. Freyberger - Chief Financial Officer

John F. Cassidy - Chief Executive Officer, President, Director, Member of Executive Committee, Chief Operating Officer of Cincinnati Bell Telephone Company, President of Cincinnati Bell Wireless and President of Cincinnati Bell Telephone Company

Theodore H. Torbeck - President of Cincinnati Bell Communications and General Manager of Cincinnati Bell Communications

Gary J. Wojtaszek - President of Cyrusone and Director


Batya Levi - UBS Investment Bank, Research Division

Simon Flannery - Morgan Stanley, Research Division

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Davis Hebert - Wells Fargo Securities, LLC, Research Division


Good morning, everyone. Thank you, all, for holding, and welcome to the Cincinnati Bell's Third Quarter Earnings Release Call. Your host for today's conference will be Kurt Freyberger. Today's conference will begin with prepared remarks followed by a question-and-answer session. [Operator Instructions] Today's call is being recorded. At this time, I would now like to turn the call over to your host, Kurt Freyberger. Your line is now open.

Kurt A. Freyberger

Thank you and good morning. I'd like to welcome everyone to Cincinnati Bell's third quarter earnings call. Before we begin, we'd like to wish our best for our friends on the East Coast, who are suffering through hurricane Sandy and send our hopes for a speedy recovery in the area.

With me on the call today are President and Chief Executive Officer, Jack Cassidy; President of Cincinnati Bell Communications, Ted Torbeck; and dialing in remotely is the President and Chief Executive Officer of CyrusOne, Gary Wojtaszek.

This morning, Jack will discuss our third quarter performance highlights and will also provide an update on the status of CyrusOne's IPO. Ted will describe for you the details around the third quarter results of our communications group. Gary will provide comments on our data center business. And I will discuss the overall financial results, liquidity and 2012 guidance. We will then conduct a question-and-answer session.

Before we proceed, let me remind you that our earnings release and financial statements are posted on our Investor Relations website. In addition, you will also find presentation slides for today's call, which we hope you will find helpful in your analysis. Today's call is being webcast if you would like to listen to it at a future time.

Now I would like to draw your attention to our Safe Harbor statement, which is presented on Slide 3. In our remarks this morning, we will be discussing forward-looking information. Due to various risks and uncertainties, actual results or outcomes may differ materially from those indicated or suggested by any such forward-looking statements. More information on potential risks and uncertainties is available on the Company's recent filings with the SEC, including Cincinnati Bell's annual Form 10-K report, quarterly Form 10-Q reports and Form 8-K reports. This presentation also contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are also on our website.

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

John F. Cassidy

Thanks, Kurt. Good morning, everyone. As always, we very much appreciate you joining us today. And I'd like to echo Kurt's thoughts and all of our best wishes and prayers are with our associates and colleagues along the East Coast as you get through this.

During today's call, we will review Cincinnati Bell's third quarter results, which reflect a continuation of the strong momentum we generated during the first half of the year, and I think further underline our commitment to continue executing on strategies that maximize value for our shareholders.

Before we discuss the third quarter results, I'd like to provide an update on CyrusOne's initial public offering process. During the last earnings call, we mentioned that we had filed for a private letter ruling with the IRS to determine CyrusOne's qualification as a real estate investment trust entity. I am very pleased to report that we recently received a favorable decision from the IRS on this private letter ruling, confirming CyrusOne's eligibility to become a REIT. We are very excited about this ruling, which allows us to continue with our plans to market the initial public stock offering for CyrusOne as a REIT entity. Also, as you may have seen in a separate press release issued late yesterday, CyrusOne intends to offer $500 million in senior notes. The net proceeds of the sale of these notes are intended to be used to repay a portion of the intercompany notes payable that CyrusOne has with Cincinnati Bell parent company. Cincinnati Bell then intends to use these net proceeds received from CyrusOne to repay its own debt. Given the significant receipt of funds from CyrusOne as a result of the offering, we would intend for CyrusOne to keep all proceeds associated with its IPO. And additionally, we expect CyrusOne to enter into a revolving credit facility. Once complete, we believe CyrusOne will have sufficient funds to support its capital demands and growth plans for the next 18 to 24 months.

We have made considerable progress toward the CyrusOne IPO over the last few months. Although there is still a fair amount of work to be done, we could be ready to launch the IPO as early as December of this year or the first quarter of 2013.

Now turning back to the highlights of the third quarter shown on Slide 6 of the presentation, revenue of $368 million was in line with the third quarter of 2011 and the second quarter of 2012. Adjusted EBITDA came in at $130 million, which was impacted by a $6 million mark-to-market charge associated with our compensation plans. We have a number of cash compensation plans that are indexed to our stock price. And during the third quarter, the 53% increase in the stock price resulted in our highest mark in almost 5 years, and therefore, the $6-million charge.

Excluding this mark-to-market charge, adjusted EBITDA would have been up $3 million, compared to the third quarter of 2011.

As can be seen on Slide 7, revenue of $368 million was down only $1 million, compared to $369 million in the same period of 2011. Over the past several quarters, CyrusOne has grown its revenue consistently at 20% year-over-year trends. And this growth continued into the third quarter as revenue increased to $57 million, up from $47 million in the third quarter of a year ago.

CyrusOne completed construction of 95,000 square feet of data center space during the quarter and sold 11,000 square feet of new capacity, which resulted in total capacity of 896,000 square feet and utilization of 78% at quarter end.

On the Communication side of the business, Wireline revenue in the quarter was down $1 million year-over-year, as our Fioptics product revenue grew 47% to $18 million in the quarter, partially offsetting the impact of access line and DSL subscriber losses. Wireless revenue was down $8 million in the quarter, as we continued to experience year-over-year declines in both our postpaid and prepaid subscribers.

Turning to Slide 8. The growth in CyrusOne EBITDA of $5 million, or 19% year-over-year largely offset the Wireline EBITDA decrease due to access line loss and the $6 million mark-to-market charge that resulted from the increased stock price.

In summary, we are very pleased with these strong results, which underlie the tremendous effort and execution by both our Communications and CyrusOne teams. We are particularly excited this quarter about the positive ruling from the IRS on the CyrusOne PLR, confirming our REIT eligible status. And we believe we'd continue to take the right steps towards the IPO of CyrusOne, which over time will ultimately lead to significant de-leveraging of Cincinnati Bell, and therefore, increase shareholder value.

I'd like to turn to Ted -- I'm sorry, I'd like to turn the call over to Ted Torbeck. Ted?

Theodore H. Torbeck

Thanks, Jack, and good morning, everyone. My remarks today will focus on the Communications group results for the third quarter of 2012. Beginning with the Wireline segment on Slide 10, revenue in the quarter was $182 million, comparable to $183 million in the third quarter of 2011. Our Fioptics suite of products continues to be very popular with our customer base, growing revenue by 47% year-over-year to $18 million in the quarter.

Enterprise growth products, which include our fiber-based data services, VoIP, cloud and collaboration services, also continued their grow trend, generating 14% year-over-year revenue growth and increase of $5 million. The revenue growth from Fioptics in these enterprise products continues to be very instrumental towards offsetting the decline in revenue from legacy access line and DSL subscriber losses.

Adjusted EBITDA for the quarter was $84 million, down from $87 million in the third quarter of 2011, due largely to access line and DSL subscriber losses, which continue to drive down voice profitability. During the quarter, we also incurred higher Fioptics subscriber acquisition cost as gross activations for Fioptics in the quarter totaled 9,000, making this the highest Fioptics gross add quarter in our history.

These decreases to adjusted EBITDA were partially offset by the combination of cost-out initiatives and growth impact from our Fioptics suite of products, which accounted for a combined $5 million year-over-year positive impact on adjusted EBITDA.

Now turning to our Fioptics activity on Slide 11. We remain very excited about the success that we've enjoyed with this product and the positive feedback that we're receiving from our customers. During this quarter, we passed an additional 15,000 homes and businesses, bringing our total units passed to 184,000, or just about 25% of the Cincinnati market.

Our Fioptics entertainment and high-speed Internet subscribers now total 51,000 and 52,000, respectively, which represents a 28% penetration rate of total units passed.

Fioptics consumer monthly ARPU increased to $131 in the quarter, up from $121 in the third quarter of 2011. This is driven primarily by the impact of customers rolling off the promotional pricing.

And with regards to the churn, the third quarter is the moving season, which generally is accompanied by higher than normal churn rates. For our entertainment subscribers, churn for the quarter improved to 3%, down from 3.3% in the same period in 2011.

We began the construction of our Fioptics network in 2009 with an initial focus towards high-volume MDUs, where we sought to maximize our capital efficiency. As we continue expanding our network, we are now targeting single-family units that have lower rates of churn. In addition, we recently began performing speed upgrades and are beginning to see churn rates improve by an average of 50 basis points in these upgraded areas. We expect our Fioptics rates of churn to continue to improve as we pass more single-family units and further increase the scope of our upgrade.

As presented on Slide 12, our Fioptics Internet subscriber base has grown by 40% the past year, which continues to be instrumental in countering our DSL subscriber losses. During the quarter, we saw net adds of 3,000 Internet subscribers as the 5,000 Fioptics subscribers were added in the quarter, which more than offset the DSL losses that we incurred, resulting in a total high-speed Internet customer base of 260,000 subscribers at the end of the third quarter.

Total high-speed Internet churn was 2% in the quarter, an improvement from 2.2% in the third quarter of 2011.

Our access line performance is presented on Slide 13. In-territory access line loss improved to 7.6% from 7.8% last year, driving an overall access line rate -- loss rate of 7.8%. As we continue to activate and retain Fioptics customers, we are also experiencing higher attach rates with our voice products, which is helping improve our access line loss rate.

In addition, the year-over-year access line loss rate for enterprise customers of 4.1% in the quarter continues to be low. Enterprise fiber-based products continue to be instrumental in partially offsetting losses from fewer access lines due to rising demands for high-bandwidth data services to connect multiple business locations into our data centers for access to our merging cloud-based applications such as hosted VoIP, conferencing and collaboration services.

In addition, the continued growth for fiber-based cell site backhaul business on our Metro Ethernet Network combined with investments in our fast growing fiber footprint present a sustainable growth model for the Wireline segment for years to come.

Now moving to Wireless on Slide 14. Total revenue for the segment was $60 million, which was down from $68 million in the third quarter of 2011. Service revenue for the segment fell 12% year-over-year to $55 million, driven by a 12% decrease in Wireless subscriber base. The segment grew with smartphone subscriber base by 6% year-over-year to 126,000 subscribers at the end of the quarter, resulting in a 17% year-over-year increase in postpaid data ARPU to $17.43. The data ARPU increase more than offset voice declines, resulting in total postpaid ARPU in the third quarter of $51.34, a 2% improvement over 2011. Prepaid ARPU in the quarter remained flat at $28.47, compared to the same period in 2011.

We remain sharply focused on profitability through cost reduction efforts, which drove the Wireless adjusted EBITDA of $21 million for the quarter, an improvement from $20 million in the third quarter of 2011. We continue to see the benefits for more favorable roaming arrangements that we're negotiating with other carriers in addition to generally lower SG&A costs. As a result, the segment generated a solid adjusted EBITDA margin of 35% in the quarter, which is up from 29% from the same period in 2011.

For the near term, we plan to continue to execute our strategy of managing this business for cash flows and profitability through the retention of highly profitable customer base and the continued implementation of effective and responsible cost reduction initiatives.

Lastly, on Slide 15, revenue from our IT Services and Hardware segment was $78 million in the quarter, down rough -- slightly from $79 million in third quarter of 2011. This segment continued to see growth from managed and professional services during the quarter, which increased $4 million, or 17% over the third quarter in 2011. This increase was, however, offset by a 9% decrease in hardware sales. For the quarter, the adjusted EBITDA of $6 million was in line with the third quarter of 2011.

Now I'd like to turn the call over to Gary Wojtaszek to discuss with you the results of our Data Centers segment. Gary?

Gary J. Wojtaszek

Thanks, Ted, and good morning, everyone. As shown on Slide 17, CyrusOne continued its strong growth trend as revenue for the quarter came in at $57 million, which is up 20% year-over-year and up 5% sequentially, compared to the second quarter. The strong revenue performance also translated into an equally strong EBITDA performance as the quarter -- as adjusted EBITDA grew to $30 million, an increase of 19% over the third quarter in 2011.

I am pleased to note that since we purchased CyrusOne in June 2010, we have consistently grown revenue by an average of at least 20% year-over-year, highlighting the strong demand in this business.

Moving on to Slide 18, we continue to forge new partnerships with first-time customers, as we added 22 new logos to our portfolio in the quarter, bringing our total count to 514 customers at quarter end. Having such a large base of customers enables us to diversify our portfolio with no customer accounting for more than 8% of our total revenue.

We also continue to be sharply focused on executing our strategy of becoming the preferred data center provider to the Fortune 1000, which currently account for about 79% of our total revenue.

Customer demand for our product is strong. We are seeing more customers reach out to CyrusOne for the first time, and our existing customer base continues to grow nicely. About 72% of our new revenue over the last 12 months has come from existing customers. And we still believe that the vast majority of their data center inventory is still managed internally, which represents a great opportunity for growth.

Moving on to Slide 19. Our revenue streams continued to be well diversified across multiple industries, and approximately 50% of our total revenue is generated from investment-grade companies. We continue to have a dominant presence in the data-intensive Energy sector, from which we generate approximately 30% -- 38% of our total revenue. The volume of global data and IT compute capacity is anticipated to grow as much as 800% over the next 5 years, which will likely put a strain on many in-sourced enterprises ability to keep pace with their data center, capital expansions and service needs.

As a result, we believe that CyrusOne will play an increasingly important role in the industry as more enterprises convert to an outsourced model to take advantage of our innovative data center products that offer multi-layers of power resiliency and the highest power density infrastructure that we are able to specifically tailor to meet the needs of our customers.

With regards to our earnings. As I mentioned, our adjusted EBITDA in the quarter was $30 million, which generated an adjusted EBITDA margin of 52%, which is comparable to 53% in the second quarter of 2012 but better than what we had anticipated.

As I have discussed in prior earnings calls, the higher operating expenses that we have seen in recent quarters are largely the result of the investments we are making in the business that will enable us to prepare for our future growth as a standalone public company. We expect to continue to make these investments in human capital and IT as well as in other SG&A-related areas through the remainder of the year, which we will anticipate will result in adjusted EBITDA margins that will be slightly lower than their current level.

Our data center capacity and utilization are detailed on Slide 20. In the quarter, we commissioned 83,000 square feet of organic capacity at our new facilities in San Antonio and Dallas, which took us 14 weeks to complete, less than the delivery times for most of the modular data center deployments that are being sold. Approximately 13% of the space in San Antonio and Dallas was presold, and demand for these locations remains robust.

We also added an additional 15,000 square feet of space at one of our existing facilities in the Houston market to end the quarter with a total capacity of 896,000 square feet.

Our utilization at the end of the quarter was 78%, which was in line with our expectations, but down from 85% at the end of the second quarter in 2012. For the past 18 months, we've been very challenged with being able to build enough inventory to satisfy customer demand. Currently, we feel we have adequate inventory in all of our existing markets with the exception of Houston, which we just started construction on the new data center in our geophysical technical center campus, which we expect will be completed in the first quarter of 2013.

Regarding new development projects, the construction of our greenfield facility in Phoenix is progressing in line with our expectations, and we anticipate commissioning this new facility by year-end. This facility will be one of the largest and most energy-efficient multi-tenant data centers in the country.

As we had expected, we are seeing a considerable amount of demand for this facility from customers located in California, as well as other enterprise customers that are looking for alternative disaster recovery space. We are hopeful that some of the space will also be presold, similar to what we originally were able to do with our Dallas and San Antonio facilities.

Earlier this year, we trademarked the phrase "Sky for the Cloud," which is CyrusOne's strategy for providing a terrestrial home for all the IT investments that are currently being made in this fast-growing area. This past week, Gartner came out with a report estimating that companies would be investing approximately $28 billion during 2012 and another $34 billion in 2013, with an additional 10% of new spending for each year thereafter, in order to handle all the technology required to handle the explosion of big data.

Our big data strategy is focused on creating massively modular data centers that take advantage of the economies of scale only achievable with the size of the facilities we are developing, like the 1 million square foot-facility we are building in Phoenix.

The other leg of the strategy is to enable a better networking solution that will provide our customers with better service and lower costs than their connectivity requirements, which we plan to provide in our new Internet exchange platform that I mentioned on the last call.

Our IX exchange [ph] Program is running according to plan and we expect to launch this product in the first quarter of 2013. We will begin beta testing on this product in Houston in the next 2 weeks followed by Dallas and then San Antonio and Austin. The IX platform [ph] uses a combination of Brocade and Infinera hardware, which will provide all of our customers with a very dense networking environment so that they can easily move their data across each of our data centers throughout the state of Texas and share that data with the rich ecosystem of carriers, digital content providers, e-commerce companies, as well as cloud vendors. This product will enable us to significantly enhance our value proposition to our existing customers and also enable us to attract several other industry verticals that we currently do not do much business with today.

We recently attended the North American Network Operators Group, and the interest and demand for this product was great and matched the interest we are seeing from our customer -- or from our current customer base.

As I have previously mentioned, a key part of CyrusOne's success will be based on our ability to attract key executives to our company who share our passion in creating the best data center company in the industry. And I'm pleased to announce that our success on this front continues. Tesh Durvasula has joined the company as our Chief Commercial Officer, and will be a key member of the senior management team, overseeing all aspects of the CyrusOne strategy marketing and sales. Tesh brings a wealth of experience in the interconnection and data center industry to CyrusOne and most recently served as Chief Marketing and Business Officer at QTS, which is a leading and well-respected data center provider. Prior to QTS, he was the Founder and COO of NYC-Connect, a privately-held interconnection business, which was sold to Digital Realty Trust and Telx. Then he also previously served as Vice President of Sales at Abovenet.

Over the past year, we have tripled our sales force, including an additional 10 sales employees that we hired in this past quarter alone, all of whom have significant enterprise sales experience. We believe the addition of Tesh to lead our sales and marketing teams will further accelerate our revenue growth. And he's going to be busy, as we still have another 900 remaining Fortune 1000 customers yet to sign up.

In summary, CyrusOne had another very good quarter. Our revenue and adjusted EBITDA continue to grow nicely. Our pipeline remains robust. All of our projects are running on time and we continue to attract great talent to the CyrusOne team.

And now I'll turn the call back over to Kurt. Thanks.

Kurt A. Freyberger

Thanks, Gary. I will wrap up today's call with an overview of the Company's consolidated financial results and a brief discussion of the CyrusOne IPO.

Turning to Slide 23, third quarter revenue was $368 million comparable to the same period in 2011. Operating income decreased to $66 million, primarily as a result of the $8 million gain we realized in 2011 from the sale of our Home Security business, combined with a $6 million mark-to-market charges in 2012 that Jack mentioned earlier. Depreciation was also up $6 million as a result of our continued data center investments. For the same reasons, net income for the quarter of $4 million is down from $18 million generated in 2011.

As mentioned on Slide 24, our free cash flow for the quarter was a negative $17 million, bringing total free cash flow for the first 9 months of 2012 to a negative $97 million. This reflects increased year-over-year capital spending of $76 million mostly related to the construction of new data center space. We expect the cash flow will continue to be negative for the remainder of the year as we continue to make investments in these growth opportunities.

As shown on Slide 25, we ended the quarter with $248 million of liquidity from our credit facilities and cash. We remain confident that this liquidity position will enable us to continue investing in growth products while also maintaining adequate support for operations.

Our guidance table is presented on Slide 26. Based on the overall solid performance in this third quarter and the strong results from the first half of the year, we are pleased to reaffirm our revenue and adjusted EBITDA guidance for 2012.

Finally, I'd like to comment further on our work around the CyrusOne IPO. As Jack mentioned, CyrusOne intends to launch a $500 million senior notes offering, which will be upstreamed to Cincinnati Bell and used to repay our senior indebtedness. This debt repayment will allow us to un-restrict CyrusOne from our Cincinnati Bell bond and ventures, which is necessary in order for us to complete the IPO of CyrusOne. Once CyrusOne is unrestricted, Cincinnati Bell will no longer have the ability to make significant investments into CyrusOne. As a result, CyrusOne will enter into a revolving credit facility concurrently with its senior notes offering. Upon completion of these financing transactions, CyrusOne will use its revolver to fund its growing operations until such time that we can complete an IPO of CyrusOne.

As Jack mentioned, CyrusOne will keep the cash proceeds from its IPO, and the combination of the IPO proceeds and the CyrusOne's revolver will provide sufficient funding for its growth plans over the next 18 to 24 months. There is much work left to do to complete the IPO, but we're making progress every day. And just as importantly, the Cyrus team continues to perform extremely well, as can be seen by this quarter's year-over-year growth rates of 20%.

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

Question-and-Answer Session


[Operator Instructions] We will take our first question from Batya Levi with UBS.

Batya Levi - UBS Investment Bank, Research Division

First question on the private letter ruling. Can you give us a sense -- some sense if the connectivity piece was also included in the qualified REIT eligible income? And maybe a question on the data center side. Can you talk -- can you talk a little bit about the pricing environment and the macro trends that you're seeing? One of the data center companies last week renewed some of the contracts due in 3 years for a substantial discount. What kind of price adjustments do you see as contracts come up for renewal right now? And also I wanted to ask if the new space sold of about 11,000 square feet was lower than the prior quarter? Was that more of a function of timing as new space came online? And if you could provide some sense for October sales.

John F. Cassidy

I'll answer the first question about the inter-exchange part of the business, then I'll ask Gary to address the pricing and the sales ratios. The inter-exchange connection piece of our revenue is -- at CyrusOne is relatively small and was included in the private letter ruling, okay? Gary, can you address Batya's other 2 questions?

Gary J. Wojtaszek

Sure. So, I'd just like to point out, Batya, so unlike some of the other competitors in the space, I think our business model is very, very different. So we historically have been operating a retail co-location business, so that means shorter-term contracts with customers taking less of footprint with us. So as a result, we have a very, very diversified base of customers. As I mentioned, no customer accounts for more than 8% of our revenue. So we don't have the same dynamics in our business model that some of the other folks do in terms of the customer concentration. So I just want to point that out. The other thing with regard to your points on pricing. What we've seen is basically ups and downs. On a net basis, our average MRC is roughly the same. And by that, it means that all the customers that have come up for renewal this year that we worked on, some of those customers have gone down a little and the prices of others -- some of those other contracts have gone up a little. So net-net, it's been basically a push. With regards to our sales funnel, we mentioned that we just sold the 11,000 this quarter. We feel very good about where we sit right now. Our actual -- our pipeline of deals has never been better than where we stand right now. So we are expecting that as we head into the remainder of this year or next, that we're going to continue to see the growth that we've been putting up over the last 2 years.

John F. Cassidy

And Batya, just a further comment on that customer base. Gary mentioned he has got over 500 customers as compared to -- some of our colleagues in the space, are more what we call wholesale suppliers, where Gary is a retail supplier. And therefore, the number of customers gives you protection. If you've got only 30 customers and 1 of them is holding up for a price change or is going to move at the end of a contract, that's a tough decision to be in. So although we have lots of that as an issue, given the fact that we are a retail supplier as opposed to a wholesale supplier, at the end of the day, you have to relieve customer pain points. And what we see the biggest pain point that the customers have is specifically around space and energy. So the pressures that other folks would have are less than in our regard, but price is important, too.


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

Simon Flannery - Morgan Stanley, Research Division

Ted, you gave a lot of details on the momentum at Fioptics. Can you just give us a little bit more color on the economics as it -- the scales of penetration get up, how is the profitability of that? And particularly on high-speed Internet, what's the ARPU lift you get from moving somebody from DSL to Fioptics HSI? And then Kurt, we saw Verizon and AT&T make 2 different moves on their pension plans to try to de-risk their plans. Are you contemplating anything like that? Any comments on what they've been up to?

John F. Cassidy

Let's ask Kurt to respond first.

Kurt A. Freyberger

Simon, we have looked to that. And that is actually something that as we move into the future and as we continue -- if you presume we'd go down the path of IPO in CyrusOne and then you presume a monetization over the next few years, that's something that could be attractive to us. And it's something that we'll assess. The idea of kind of insulating that liability and matching up some long bonds against it is something that we definitely will consider as we have money from the future CyrusOne monetizations. But that's probably a couple years down the road before we would have that kind of money to take care of the unfunded pension plans that we would have.

John F. Cassidy

And Ted, do you want to talk...

Theodore H. Torbeck

Yes, Simon. Really on the ARPU, there's no increase on high-speed Fioptics. However, we feel that mortgage will continue to improve steadily as time goes on.

John F. Cassidy

And of course, what that means is that it's a comparison of DSL economics in terms of ARPU to Fioptics ARPU. And of course, the things you get with the Fioptics sub is you're now getting -- you're protecting -- you're basically trading and protecting your DSL. You're gaining the local access, you're gaining the entertainment piece. And you're upgrading them into a much higher speed system than you would get under the copper-based DSL. So ultimately, it's a great protection and also a good grower. And as Ted says, margins will increase once you get off the introductory offers, should be good.

Theodore H. Torbeck

And I'd also point out there that with Fioptics, I mean, that's almost an automatic 2, right? About 90% of the -- those customers take 2 products, both the entertainment and the Internet. And so we're getting more of the consumers' wallet with that Fioptics product suite.

Simon Flannery - Morgan Stanley, Research Division

And seeing better churn than on a single product?

John F. Cassidy

Yes, we have.

Theodore H. Torbeck

Especially with the high-speed Internet. I mean, that -- when you're able to top or up to 100 megs, the customer just loves that product. And anytime we get over 10 megs of speed, where we can offer that product to the customer, we're in the low 1%, even below 1% kind of range on the churn.

Kurt A. Freyberger

So Simon, the way we look at it today is we look at it as a high-speed customer. And you'll note that we ended year-over-year up 3,000 subs, which is 1% to 1.5% growth, which beats the heck out of 2% to 3% negative growth across the line, as copper subs flip to Coax or other Internet providers. So we really see a stabilization in this world, compared to 10 years of declining access line and DSL sub base against a superior cable product.


We'll go next to Frank Louthan with Raymond James.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Looking at the customer concentration in some of the new properties of the data center, can you give us an idea what was customer concentration, say 12 months ago? Was it more than 8%? And then looking at the San Antonio, you're at 17% utilization right off the bat. Can you give us an idea of the backlog there and how quickly you think that will catch up with some of your other facilities as far as utilization?

Gary J. Wojtaszek

Hey Frank, Gary here. I don't know specifically, but when I'm thinking about of all the different customers that we've signed on over the last year or so, there's no big movement there that would change the mix of those customers. So I wouldn't expect that there's any big movement in terms of the mix of those top 10 customers or so in terms of the concentration. With regard to San Antonio, that was a market that we like. That was the fourth leg of the Texas platform that we were focused on executing there. And the initial demand for that has been nice. And we've put in about 3 customers so far in that facility. And we're very positive about the initial reasons for going into that space are -- still remain. We're the only enterprise class multi-tenant data center operator in that market. And that gives us a unique position.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Okay, great. And then on the Wireless side, a lot of activity in the Wireless industry right now. Is that something you might consider monetizing, particularly as your video base gets larger? I mean, is that -- how over time, how core is that going to be to your operations?

Kurt A. Freyberger

Yes, frank. I don't think we've been particularly secretive in the past to say that with roaming and handset, dis-economics that we're always willing to look at partnerships and monetization opportunities of that business, and we continue on with that same attitude.


We'll go next to Jonathan Schildkraut with Evercore.

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Just a couple of questions for Gary, if I may. First, there was some conversation a little earlier about customer concentration. But based on our review of what happened to one of your competitors, it wasn't just about customer concentration but about the types of customers. The customers that would be likely to build or are building their own data centers. And so if you can give us a little perspective on your customer base, and as you look at it, who out there has kind of been building their own data centers or are likely to? The second question has to do with hybrid architecture, the use of multi-tenant environments and dedicated environments. Just wondering what you're seeing down that path, and maybe the Company's approach to addressing it. And then finally, in the past, Gary, you've talked a little bit about developing an indirect sales channel. And I was just wondering if there is any progress there.

Gary J. Wojtaszek

Sure. Hey, John. So on the customer base, I mean, that is -- well first, let me start off. I mean, I think the market absolutely overly punished the other competitor in space that entered into those arrangements. I think it was totally oversold on terms of what they were able to do. But with regard to your point about the customer base, I mean, that is -- that's kind of a key value proposition for us. So if you look at the type of customers we have, what you will not see in any one of our customers is any of the big Internet web scale type companies, which historically have been building out their own data centers at a very rapid pace. In fact, one of the reasons why we signed on Kevin Timmons as our CTO was basically for the expertise that he's had building data centers around the world for both Microsoft and Yahoo! So what we're trying to do is basically, make the economics available that the Internet companies have previously been able to enjoy for the last 2 decades or so, building their own data centers, and making that product available to our enterprise customers. If you looked at our list of customers, what you would see is 70% of our revenue today or 80% of our revenue today is derived from the Fortune 1000, and none of those companies basically include any of the Internet companies that have historically built their own data centers, such as Kevin was doing in his former position. So when we look at our customer base, they really have no economies of scale and no right to ever want to build their own data centers. So when we look at the base of the Fortune 500 that we're going after, we'd expect that over time, all of them will eventually outsource all of their data center needs to a company like ourselves, pretty similar to the way the whole electric utility model has developed. And none of those Fortune 500 companies today would ever consider building their own generating plant and power their building that way. We don't expect that they will consider ever building a data center go forward as well. So that's a key part of our proposition. And it's also a key part when we price to those customers, they are generally less price sensitive as some of the Internet guys are because -- primarily because they are not doing nearly as large deployments. So in those super wholesale deals where you're talking 8, 10, 12 megawatts, those companies are spending $20 million annually on a data center. Our general footprint is much smaller, so the price aspect of this isn't nearly as a focused phenomenon. With regard to your second point on hybrid architecture, our view is that long term, as our customers become smarter in terms of understanding their applications that they're managing -- and the whole business that we're in is providing a data center to achieve optimal use of computer applications. And so when we think about the applications that your typical Fortune 500 CIO is managing, which is roughly between 3,000 and 10,000 applications, he's trying to think how does he deploy those applications most efficiently. And when he thinks through that math, there's 2 parameters that drive his choice of a data center provider. It's going to be based on latency requirements of that application to his customer, as well as the criticality of that application to his business. So when we think through that, what he's going to be focusing on more and more, is that he's not going to require a Ferrari-type solution when a Chevy is going to be sufficient. And what we've been able to do with our product offering has been very innovative from the perspective of being able to provide different levels of product on that same white floor. So when we look at a white floor in our facilities, we don't see one boring, bland product. We see multiple levels of product on that floor. And we're very innovative in what we are able to sell customers. So we can sell them solutions that are going to provide high availability, high insurance policy where you never go down, we guarantee that with 100% SLA. And those are types of the applications that are maybe running in ERP system for Fortune 500 company or an e-commerce platform, where they can never afford to go down. Other applications though, don't require that same level of resiliency, such as, let's say, trading algorithms or some batch processing type jobs. And we provide a solution on our floor to provide different levels of resiliency to provide an infrastructure to support that. And those are sold at very different price points because what we're trying to achieve is the customers' pain points in terms of how they deliver their entire application across their entire stack. So from the hardware that they are deploying to that, all the way down through their infrastructure and then beyond that into their networking. And that's the reason why we are launching into this IX platform that we're going to have in Texas in the first quarter. And what that does is just a continuation on this whole management of the IT stack. So if you think about that, that customer, we're looking at a different level of the resiliency based on that fact plane. The other step in this, is also thinking about the criticality of data centers from a primary and a DR perspective. So when we launched that IX exchange platform, what we're going to be able to sell customers on is not just the ability to serve up different levels of resiliency within a data center but across an entire state, where they can really achieve an optimal total cost of ownership, really kind of focused on pulling out costs from their whole application management. Your third point was on indirect sales. This is something that we started on in the last 15 months or 18 months or so ago. So historically, the Company has only been focused on direct sales. Historically, it's just been people cold calling customers, going out talking to them and spending a lot of time on a consultative sales with customers. So we've done a phenomenal job in executing on that. And we've actually beefed-up, as I mentioned in our sales in the last year, by 300%. We now have 30 people in sales. Included in those 30 individuals that are working in sales are a number of indirect sales folks that we've just started on. So now we're starting to sell some of our product through the real estate brokerage channel, something that historically, we never focused on. We're working with different vendors and partners that are doing a lot of white labeling. We are also working with VARS and managed service operators that are either selling our product directly to their customers or selling our product as part of a solution, managed service solution that they're providing to their customers. So those are areas that go forward, we'd expect that we're going to be generating a significant amount of revenue from those channels. And historically, we've not really focused on that at all.

John F. Cassidy

Jonathan, I certainly hope you take the recording of that presentation and give it to your IT folks because anybody here is asking who want to be in our center.


We'll go next to David Hebert with Wells Fargo.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

Just wanted to ask about the debt that's being taken out at Cincinnati Bell. First of all, how much are the CBT notes that are being repaid?

Kurt A. Freyberger

It'll be about $73 million.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

$73 million, okay. And any early thoughts post IPO and notes offering on -- at CyrusOne? How are you thinking about the capital structure going forward?

Kurt A. Freyberger

I think as we go forward, our goal over time is to have our debt at a level that's appropriate for a telco. And so as we -- as CyrusOne IPOs and as we enjoy the fruits of that, as they continue to increase in value, I mean, I think what we would intend to do over time is monetize down and end up in a place that's appropriate for a telco, somewhere between 2x and 3x EBITDA.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

And that's over time. You mentioned, I guess, a 2-year timeframe. Not trying to put a target on it, but you did mention monetization plan for...?

Kurt A. Freyberger

I didn't. I didn't. If I did, I apologize. I didn't mean to imply a 2-year timeframe. We are still bullish on the data center industry, in CyrusOne in particular. We're not committing to a certain path in terms of when we would sell down further CyrusOne investments. I mean, I think we -- that's something we'll be communicative about as we do it, and we won't be disruptive at all. But that's not something -- we don't have a set plan on when we would monetize CyrusOne further.

John F. Cassidy

For the first -- this debt offering shows our intention of paying basically $0.5 billion of debt down. In addition to that, Cincinnati Bell gets roughly 75% to 80% of the tail of the IPO, which it can monetize for multiple purposes. But I've always been clear, as Kurt has just been clear, that we think that the Company needs to have a debt structure appropriate to its industry. But again, there's a tremendous value in that 75% to 80% tail of CyrusOne. And we intend to watch that closely.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

Okay. And this may be a question for Ted. So how are you balancing the focus of focusing on Wireless cash flow while staying competitive on price and subsidies? And as you know, it's a very competitive environment out there. Just wanted to get your thoughts there.

Theodore H. Torbeck

Well, again, I think we're managing the Wireless business based on profitability. We're doing, I think, all the things that we can to prolong the customers as far as churn is concerned. So we're doing everything there. So it is a balancing game. But right now, it's -- I think in -- there are still areas that we can continue to take costs out. And we're looking at doing that as well. The other thing that we didn't bring up is that we do bundle with Wireless, with our other products. And that also helps as far as longevity and keeping churn down.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

Right. Okay. And sorry if I missed this, have you given a CapEx number for Fioptics for 2012? Any sort of target there?

John F. Cassidy

No. We generally don't talk about CapEx per division. It's Prego spaghetti sauce, it's in there.


We'll go next to Alex Sharnelli [ph] with SM Investors [ph].

Unknown Analyst

I just want to kind of follow up to one of your [ph] question about the monetization of CyrusOne. I know we're talking about if it happens a few years down the road. But depending on which -- the number you use -- which you use, assuming that you can use your NOLs to shield any capital gains. You might need slightly over than 50% of the proceeds to pay down debt at a level that's comfortable for you, so you'd be left with a lot of money. How do you think about that eventual pile of money that's left? Like, would you buy back shares? Would you invest in the Company, I mean? So I'm just curious about that. I know we're talking about a few years out the road -- down the road and a lot of ifs in this question. But I'm just curious about your take.

John F. Cassidy

Well, it's been a question, frankly, over the last 9 years we haven't had to answer because we had a lot more debt than money. And when we began this strategy on the data center business some years ago, it was based with the intent of, number one, relieving pain points of customers here in Cincinnati, and then we expanded to CyrusOne in Texas. And we've been blessed by having a fantastic group of customers, a fabulous group of employees. And I would agree with your assumption that yes, down the road, there's going to be a lot of liquidity in the asset of CyrusOne. So I think the Cincinnati Bell shareholder has made a great investment in, not only for now, but for down the road as well. In terms of how do we intend to invest, because it's hard not to notice that the revenue and the EBITDA of the local business is under pressure, as all telcos are. And I think the options that we have then, whether it's a dividend, whether it's a stock repurchase, whether it's to invest in new growth businesses, all those are there. And we're considering the strategies not to get too far over our SKUs. But we're considering the strategies of what the next 3 to 5 years might look like. So I don't think that -- if I look at the history of Cincinnati Bell, from Convergys to CyrusOne to other things, the Company has always been a relatively small landlocked telephone company. So in order to grow, it needs to be at the forefront of technology distribution and new businesses. And I don't think that that's going to discontinue. On the other hand, I think that every investment that we make has to consider the shareholder as the primary return interested party. And we continue on from there. So I can't say how we might spend money 3 to 5 years from now, other than the fact that we will get to an appropriate amount of leverage. And our activities from there will be intended to, as we have over the last 10 years or so, to increase shareholder value.


And at this time, we have no other questions. I'd like to turn the conference back to Mr. Freyberger for any additional or closing remarks.

Kurt A. Freyberger

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

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