Cincinnati Bell Inc.
Q2 2018 Earnings Call Transcript

Published: 8 Aug 2018

[Operator:]

Please standby. Good day and welcome to the CBB's Q2 2018 Earnings Release Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Josh Duckworth. Please go ahead, sir.

[Joshua T. Duckworth:]

Thank you and good morning. I’d like to welcome everyone to Cincinnati Bell’s second quarter 2018 earnings call. Today’s call is being recorded if you would like to listen to it at a future time. Before we start, let me remind you that our press release and presentation slides for today’s call are posted on our Investor Relations website. In addition in the first quarter of 2018 Cincinnati Bell changed its segment reporting to more closely aligned with our long-term strategy of building two distinct complementary lines of business. To highlight the success of our fiber investments, the entertainment and communications segment is now reported in the following three categories, Fioptics, enterprise fiber, and legacy. To better reflect the strength in our recurring strategic IT services, within the IT services and hardware segment, revenue is reported in the following practices; communications, cloud, consulting and infrastructure solutions, which was previously referred to as telecom and IT hardware sale. Also, as a reminder, the new revenue accounting standard was effective January 01, 2018 and as a result, infrastructure solution sales are now reported net of cost-of-goods sold with prior periods also being restated for comparability. Now, I would like to draw your attention to our Safe Harbor statement presented on Slide 2. In our remarks this morning, we will be discussing forward-looking information. Due to various risks and uncertainties, actual results or outcomes may differ materially from those indicated or suggested by any such forward-looking statements. More information on potential risks and uncertainties is available in the Company’s recent filings with the SEC, including Cincinnati Bell’s Annual Form 10-K report, Quarterly Form 10-Q reports, and Form 8-K reports. The presentation also contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are also available on our Web site. With me on the call today is our President and Chief Executive Officer, Leigh Fox and our Chief Financial Officer, Andy Kaiser. Leigh’s comments today will recap recent highlights for the second quarter and provide an update on the merger with Hawaiian Telecom. Andy will then provide an update on our financial performance by segment and our 2018 guidance. Following the prepared remarks, Tom Simpson, our Chief Operating Officer will join Andy and Leigh for the question-and-answer session. With that, I am pleased to introduce Cincinnati Bell’s President and Chief Executive Officer, Leigh Fox.

[Leigh R. Fox:]

Thank you Josh and good morning everyone. Thanks for joining us today. Our second quarter results demonstrates this team's ability to execute our strategy of expanding Cincinnati Bell's fiber network while advancing its next generation service based IT products within two distinct complementary business lines. As highlighted on Slide 5, consolidated revenue for the second quarter was up 14% compared to the prior year due to continued demand for our fiber offerings and IT services which include results from our OnX acquisition. Adjusted EBITDA increased 3% from a year ago on strong revenue growth combined with synergies realized from the acquisition with OnX as well as other cost out initiatives. In our IT services and hardware segment revenue growth in our communications practice should be seen as an extension of our 140 year history as a service provider of voice solutions that has now been extended across a much larger footprint. While many of our peers continue to report these services as a part of their core telecommunications business, we have separated them out into a separate organization to focus on national and international growth. We have combined our history as a strong service provider with our understanding of network configuration, a valuable resource as businesses upgrade from legacy voice and data applications to customized UCaaS, SD-WAN and NaaS solutions. This strategy is working better than even we had initially planned. To illustrate our success in the first half of 2018 alone we have new multi-year contracts with more than 650 customers that have a combined total contract value of over $50 million. When fully implemented these contracts will represent $1 million of our current monthly revenue. Even with these impressive results our sales momentum for all of our recurring services continues to grow. In our entertainment and communications segment Fioptics revenue growth totaled 11% year-over-year as demand for faster internet speeds accelerates demonstrating the need for continued fiber investments in order to capitalize on future growth opportunities. In the first six months of 2018 with half an incremental 17,000 new addresses with fiber and now offer a fiber to the premise product to 55% of Cincinnati's total addressable market. Our Fioptics suite of products which includes a combination of our fiber to the premises and node addresses is available to over 589,000 homes and businesses or approximately 72% of Greater Cincinnati. Turning to Slide 6, the completion of our merger with Hawaiian Telecom represents a major step forward in scaling our base of high quality, natural fiber assets that will be required to meet the growing demand of IoT ecosystems and to deliver the future promise of 5G. Today fiber is available to more than 65% of the 325,000 homes and businesses on the Island of Oahu representing a solid foundation to replicate Cincinnati Bells fiber success and reverse recent trends in Hawaii. As evidence of the strength of our partnership during the second quarter of 2018 Hawaiian Telecom's financial performance stabilized with revenue and adjusted EBITDA remaining consistent with the first quarter results. Further evidence of the strength of Hawaiian Telecom's natural fiber network is demonstrated on Slide 7. During the quarter Hawaiian Telecom added 1700 new video customers and 800 new Internet customers as revenue growth from these products offset legacy voice declines. Hawaii's video churn remained low at 1.6% while ARPU was down 4% year-over-year as the company successfully increased market share in the single family homes and bulk MDUs in a heightened competitive market. For the internet product a combination of customers migrating to higher speed products and price increases resulted in 10% increase in Internet ARPU from the prior year offsetting some of the video ARPU pressure. For the business market Hawaiian Telecom's revenue increased slightly compared to the first quarter due to an increase in lower margin equipment sales and continued growth in fiber product. As of the end of the second quarter the company had deployed fiber to the premise to approximately 45% of the nearly 39,000 business addresses statewide stabilizing data revenue with only a 10% penetration rate in the upgraded footprint. This represents a significant opportunity to increase penetration, market share, and ARPU of customers move to higher bandwidth and faster Internet speed fiber products. Along with fiber internet Hawaiian Telecom's strategic hosted voice products continued to do well mitigating legacy voice line losses and providing higher ARPU on longer-term contracts. In the second quarter business voice over IP revenue grew 20% year-over-year driven by 13% increase in voice over IP lines and 5% growth in ARPU. We're also seeing increased opportunity within business market for our IT service products which should present future business upside. Turning to the carrier market Hawaiian Telecom faced similar challenges to Cincinnati Bell due to the ongoing network rimming [ph] and pricing pressure from national wireless carriers as they look to optimize efficiency of their current networks as well as find 5G deployments. As we had seen in Cincinnati we believe that deep measure of fiber is the only path to growing future relationships with these larger carriers. As supporting evidence to this in Hawaiian we were recently awarded a multi-year small cell contract with a large national wireless carrier to build and provide services to 250 small cell sites. The implementation of these sites is expected to be completed over the next 18 months with construction beginning in the third quarter of 2018. In addition, the company currently provides wireless backhaul service 60% of the current cell sites in the state and is under contract for an additional 180 sites that will bring its wireless backhaul market share to more than 80%. Moving to the SEA-US Trans-Pacific fiber cable connecting agent to the United States which Hawaiian Telecom is part owner and operator. Demand for capacity continues to be strong and the company continues to actively market the remaining 40% excess capacity on the system as well as additional treasure [ph] cable landing and backhaul services. As the integration efforts accelerate post close we are focused on increasing fiber into our penetration driving efficiency by optimizing the efforts on our field and contact center as well as all aspects of quality and customer interaction. In order to reduce construction costs and maximize revenue on fiber available doors we're working to reduce sales activity lead times for installation and repairs by standardizing the model to dispatch technicians as well as coordinating construction and engineering efforts with sales planning. Efforts are also underway to align call center operations to increase efficiencies while improving the customer experience. In addition to sharing Cincinnati's approach to sales and target marketing we are working to enhance telemarketing and customer retention efforts and resweeping [ph] fiber built neighborhoods with door to door sales reps. We're encouraged by Hawaiian's most recent quarterly results and are confident in our ability to execute on our fiber growth strategy. We are also working diligently towards achieving our cost synergy targets. I am pleased to say through minor initial cost reductions and co-sourcing of common vendor contracts we have achieved commitments to more than half of our target within the first month after close. In closing Hawaiian Telecom's distinctive brand as a hometown fiber provider, unique strength in its local market combined with significant fiber investments position us well to capitalize on the future data trends and we are confident in the future outlook of this business. Let me now turn it over to Andy who will provide additional detail for Cincinnati Bell's quarterly financial performance and updated financial outlook for the year.

[Andrew R. Kaiser:]

Thanks Leigh. Starting with our entertainment and communications quarterly performance on Slide 8, revenue and adjusted EBITDA decreased from the prior year primarily due to the completion of a onetime fiber build in the second quarter of 2017. In addition changes in our segment reporting consolidated all VoIP and UCaaS revenue into our communications practice within the IT services and hardware segment which has had a flattening effect on E&C revenue. Second quarter legacy revenue declines were partially mitigated by Fioptics and enterprise fiber revenue growth after excluding the impact of the onetime project a year ago. Our strong Fioptics metrics which were highlighted on Slide 9 further demonstrates the success of our fiber investments. During the quarter we had 2500 Fioptics Internet subscribers with penetration rates reaching 40% as ARPU increased 3% to $51. Again this quarter Fioptics subscriber growth offset legacy DSL declines and total Internet subscribers remained consistent with the prior quarter. We ended the period with 145,000 Fioptics video subscribers up 2% from a year ago. Video churn was 2.7%, up slightly compared to the prior quarter due to price increases at the beginning of the year that resulted in a 5% increase in video ARPU compared to the second quarter of 2017. Churn was also impacted by the increased adoption of OTT as consumers migrate away from traditional linear TV programming to more flexible and affordable packages. Over the past several quarters we have been working on a solution to address these changing demands and we are happy to announce a partnership with an OTT provider that will be available beginning this quarter. Moving to the IT services and hardware segment performance on Slide 10, second quarter revenue of $128 million increased $1 million sequentially as growth from the consulting and communications practices offset declines in the hardware sales. Adjusted EBITDA totaling $14 million was up 20% compared to the first quarter of 2018. As demonstrated on Slide 11 we remain particularly excited about the communications practice as the growth in Strategic Services continues to offset legacy sea like declines. During the quarter we increased our NaaS locations by 38% and more than doubled our SD-WAN locations. We also added $14,200 hosted UCaaS seats and now manage 192,000 profiles. In addition we are pleased to report a number of new contracts this quarter that will add 430 NaaS locations and 65 SD-WAN sites as we continue building on this momentum and win more multifaceted deals across our diversified customer base. Moving on to Slide 12 I'd like to provide an update on free cash flow in our capital structure subsequent to the close of the combination with Hawaiian Telecom. Total consideration including fees and expenses for the merger was approximately $560 million of cash which was funded with proceeds from the $350 million, 8% senior notes due 2025 previously held in escrow, borrowings on the accounts receivables facility of $154 million, borrowings on the revolving credit facility of $35 million and cash on hand. As such pro-forma net debt would be approximately $1.9 billion resulting in leverage of 4.6 times. As noted on the slide we have no significant debt maturities due until 2024 and our pro-forma liquidity remains strong at one $190 million. Though we are confident our current capital structure provides the appropriate flexibility to execute our long term growth strategy, our goal remains for leverage to be approximately four times. In addition to the cash consideration we issued 7.7 million Cincinnati Bell common shares in connection with the close and now have approximately 50 million common shares outstanding. Before moving on to capital expenditures year-to-date free cash flow totaled $26 million and we remain on target to generate full year positive free cash flow. As outlined on Slide 13, capital investments for Fioptics suite of products totaled $21 million in the second quarter including construction costs of $9 million. Year-to-date we added 17,000 new fiber to the premise addresses and we now anticipate being able to pass 40,000 new homes and businesses during 2018 up from the previously communicated 35,000 while maintaining our original outlook for capital expenditures. Turning to Hawaiian Telecom we will consistently apply our strategy for capital allocation and invest in fiber where we identify opportunities to gain or maintain market share. For the remainder of the year we expect capital expenditures for Hawaiian Telecom to be between $40 million and $45 million including the expansion of Hawaii's next generation fiber network, success based enterprise fiber builds, and maintenance. In the second half of 2018 we expect to pass an additional 1000 addresses on Oahu and another 1000 doors eligible for cap funding on the neighbor islands. Including Hawaiian Telecom we are updating our expected capital expenditures to be between $230 million and $255 million for 2018. Turning to Slide 14, looking forward to the remainder of 2018 we expect Hawaiian Telecom's revenue to be between $175 million and $185 million and generate adjusted EBITDA between $43 million and $49 million. As a result we're updating our full year revenue guidance to be between $1.375 billion to $1.46 billion and adjusted EBITDA to be between $363 million to $379 million. Interest payments will increase to between $120 million and $130 million and contributions to pension and post retirement plans have been updated to be between $20 million and $30 million to include funding for Hawaiian Telecom's pension and post retirement plans. With that I will now turn the call back to Leigh for some closing remarks.

[Leigh R. Fox:]

Thank you Andy. We are very pleased with the progress we have made towards scaling our business and building a more diversified platform for growth and sustainable free cash flow. Today we are well positioned to capitalize on significant market opportunities within our two distinct lines of businesses and we are excited about what we can accomplish in the future. In our entertainment and communications segment we have a clear path forward as we execute on the integration of Hawaiian Telecom and continue expanding the fiber network within our respective footprint. In light of accelerating demand for greater bandwidth, our fiber to the premises investments remain a key differentiator in the marketplace and we are excited about the opportunities to replicate our fiber success in Hawaii. In our IT services segment we remain focused on growing higher margins, recurring contractual IT services revenue across our North American platform, and our diversified customer base. As evidenced in our results, our enhanced scale and robust product offering position us well for growth outside of our historical footprint. We are confident of the road ahead and will continue to invest where we are winning while maintaining a disciplined approach to capital allocation and identify opportunities to reduce leverage to deliver long-term value for our shareholders and our customers. I will now turn the call over the operator and open it up for Q&A.

[Operator:]

[Operator Instructions]. We will take our first question from Simon Flannery with Morgan Stanley.

[Simon Flannery:]

Great, thanks very much. I wonder if you could just talk about Hawaii. I note you have the second half EBITDA above the first half EBITDA, could you just talk about the opportunities that are driving that and maybe just update us on how the integration is doing, what have you done in terms of management structure, and also what should we be expecting in terms of integration costs? Thanks.

[Leigh R. Fox:]

Hey Simon it is Leigh. Thanks for the question. I'll take -- I'll try to answer all of them but Andy, Tom please feel free to chime in. Management structure wise, pretty happy with the team we have out there. We've reorganized day one, we have focused on basically in an integrated team between E&C Cincinnati and E&C Hawaii. We have new leadership, a new sales focus, and we've really reorganized around how we've structured things here in Cincinnati from the success we've seen. So we're pretty happy about that. Tom why don’t you talk about the integration efforts and what you're focused on and then I will talk about the opportunities that we see.

[Thomas E. Simpson:]

Sure, sure, hey Simon. From an integration standpoint, good morning, within the first 90 days as Leigh spoke on the reorg. We have focused on the call center as it was very diversified so we're unifying the call center much like the strategy here from a context stand point as well as field and sales integration planning. We are very good in Cincinnati at minding our construction and insulation to field capacity and so we're aligning the field force in Hawaii to do the same.

[Leigh R. Fox:]

And then on sell side and opportunities, we see obviously a lot of opportunity on the consumer side. It's a bit of a different market obviously from the standpoint of the mix between FSU and MDU. They're winning good ball fields there. We see opportunity there on the consumer side. Our challenge I think going forward will be to distinguish the metrics between the two from what you're used to seeing here in Cincinnati versus what you will see in HCOM. It's just two different sets of metrics to our different opportunities in two different cost structures underneath it. But we'll do as much as we can to be as transparent as possible to articulate what the difference is there. We see huge opportunities on the business side both from the standpoint of fiber deployment and penetration into the fiber markets in the areas that they've already built. They've built a ton of GPON in the area and I think at this point they're only 11% penetrated in that area so we see a massive upside there. And part of that was just kind of reinitiating focus in the way that we do it here in Cincinnati and working with those teams. Got an excellent team there so I'm really excited about the potential on that side. And then on the IT business front we see huge opportunities there, we've begun discussions and partnering and we have begun partnering with the folks even prior to the deal being closed. But through CVTS we see a lot of opportunities working with state local education and small to be in business. So a lot of opportunities on the business end.

[Simon Flannery:]

Okay, anything on integration costs?

[Leigh R. Fox:]

You know I would say as I mentioned in the script we're ahead of where I thought we'd be on integration costs. We didn't put honestly a lot out there because we're focused on revenue upside and really it was less about cost structure but we're seeing a lot of potential as I mentioned through just the insourcing of a few contracts and the co-sourcing of a few contracts, I think that's probably a better term. We're going to see savings not just in Hawaii but also here in Cincinnati over the next few years. So those are the type of opportunities that we saw and we will begin to articulate more and more over time. We use common vendors, we have common platforms, and so as we gain scale and are able to combine these things we should see synergies and we will articulate this further.

[Simon Flannery:]

Great, thank you.

[Operator:]

And next we will go to David Barden with Bank of America Merrill Lynch.

[David Barden:]

Okay, guys thanks so much. I guess two kind of subset questions so the first question would be Leigh on the synergies. When this was originally presented it was kind of comingled with the OnX deal. Could you talk a little bit about what of the 21 million run rate synergies was -- is really about Hawaii? And then, kind of with the cadence I think you said you had 50% of some target achieved in the first month, I wasn’t sure I got that. And then when you think about the synergies themselves how are you allocating them, are we going to see those synergies reflected in HCOM margins or to say bill margins or some split? And then the second set of questions is really were around the new communications segment disclosures. And how Leigh should we use these to help us model that comp segment. Leigh I think you said you had 650 million new contracts, $50 million total value, 1 million run rate monthly. If you do the math on that that implies that the average contracts about 1500 per month with the four year life are those the kinds of deals that we should expect and/or is there a much broader spread of these kinds of deals. So it would be helpful to kind of know what we do with these numbers to help us model that segment? Thanks.

[Leigh R. Fox:]

Yeah, so I will start with synergies, up 21 million, 11 million was attributed to HCOM. What I mentioned in the script was we feel like we've already captured through contract negotiations half of that 11 million. So we look at that as a recurring annual number in cost. We'll see that come through, we said within the next two years, that was the contract renegotiations. What we're trying to do from the standpoint of split that was the HCOM portion of it. There's going to be an impact to CBB also, so will -- you'll see that in the numbers. It will honestly be a little difficult for us to point out but there was an impact to CBB margins also in that. So as we can better define it for you as they come through, we'll try to highlight that. Honestly David one of the reasons why I dislike continually reporting two entities when you start merging them because you do have a little bit of messiness on how things land. Through scale you're gaining synergies and efficiencies to scale, yet you're trying to kind of separate and allocate it. There is a lot of weirdness but we will do the best we can but what I was really talking about was associated with HCOM. Timing is again you'll see that coming over the next several months. On the disclosures for the communications business, the way to think about that I think contract wise taking the averages is I guess appropriate. In reality what you see is you see a mix of larger customers and smaller customers. The timing I think is probably the more difficult thing. As we implement these projects the implementation timeline can be anywhere from six months to twenty four months depending on the complexities of the integration so you're going to see gradual increases in revenue and margin on that side. But we are -- we'll work to try to hone that down a little bit because from modeling standpoint I know it's important for you guys to be able to kind of bring that timing appropriately. For right now I would say, if the average installed life is anywhere from 12 to 24 months I think you're safe to come and blended in that way and we've begun installation sometimes that you can kind of model it that way. I think that answers the question.

[Thomas E. Simpson:]

David the only thing I would add to that is I do think that's appropriate -- across a lot of contracts. So it's reasonable to model. But we have opportunities as you might imagine and I think you mentioned this in your question that really cover the spectrum by way of size of the implementation. So we could get a deal or two that would skew those numbers. We would obviously talk about those on subsequent calls so for purposes of modeling I think it's reasonable to use the map that is out there currently.

[Andrew R. Kaiser:]

The reason -- if you sense a hesitation from me David is from a modeling standpoint that the messiness in trying to kind of model it averages is that you could have a very large contract with a big client where if you kind of modeled in the averages you may not see it but then also you see this burst and then because the inflation or part of the inflation for major components of it is complete and you see this kind of tiered uptick. So it's going to be really hard for us to guide you through timing of that kind of stuff but it's there and we will do the best we can to kind of talk you through from quarter to quarter.

[Thomas E. Simpson:]

One final note David that has the sort of effect of muting the communications practices, there is legacy as we've talked about a lot in the past. We shifted to keep the communications practice clean and move really all VoIP related. Revenue and business into one central location, there is legacy decline in there so that also needs to be contemplated.

[David Barden:]

Thanks for that color, I really appreciate it. If I could just do one follow up, just on the core business on the Fioptics side, it looks like Fioptics had a smaller than normal Internet ad quarter, the video was negative. Was there -- obviously it's a seasonally weak quarter in general but I was wondering if there was anything more specific that you would like to call out on kind of the trajectory maybe for the rest of the year in that -- on the Fioptic side?

[Leigh R. Fox:]

Yeah on the -- I will start with the video and then I'll talk about the Internet. On the video side we are honestly seeing an accelerated impact of core cutting. You know all the Internet take rates now are I think double, our video take rates. So that's accelerating which honestly we don’t view as a bad thing. If I could flip a switch tomorrow and get out of paying content cost and having internet customers over the top I would do it. So this migration for me on the video side is a very positive thing. As we mentioned we just launched an over the top product, we're looking at other partner shift. So, this is a direction everything has had. On the cord cutting side that was happening a little quicker than I thought but it's not a bad thing. On the Internet side you are seeing a little bit of seasonality, I think that should pick up for the end of the year but to be candid we're not chasing subs either and I think in the past we've articulated this is all about cash flow. We are looking at sub additions through that lens which is a different lens, right and we talked about internally a lot. You know we don't chase that top line metric, it is going to be really hard for folks on the street to say hey, how do I tie that cash. But if you really think about why we're doing it I want to chase the most profitable subs. You should see that in ARPU, you should see it in some of the other metrics. But by doing so if I look at it in the vein of cash I'm doing the ones that have higher self install rates. You know cost just left to implement it, drive cash flow efficiency, drive capital efficiency, you see that in capital and I think you're seeing that in the first half of the year, you are seeing capital efficiencies. And honestly we should -- for the year we should end up in the low-end of our capital guidance because of all this. And what that does is that it allows us to be more cash efficient to have more money to obviously put towards fiber, to pay down debt. So that's the approach we're taking. So it is about cash and cash efficiency. So you're going to see a little bit of that impact but it was a mix of seasonality and the fact that we are just -- we're aren't chasing subs or chasing the right subs.

[David Barden:]

Got it guys, thanks so much.

[Operator:]

And next we will go to Batya Levi with UBS.

[Batya Levi:]

Great, thank you. Maybe just a follow up on the prior question, can you talk a little bit more about the competitive intensity in broadband, have you seen any change, I believe there wasn’t a much of a price uptake this year so far, and can we see a rebound in the broadband ads going forward? And also how should we think about you marketing more the new OTT partner or your new OTT offer on the video side versus the traditional video business that you have within the bundle? And maybe just finally on the enterprise side, can you talk a little bit about demand for enterprise fiber, are you seeing more new business coming in or is it just increased usage of the existing base? Thank you.

[Leigh R. Fox:]

So sorry I'll start with the first one, I might not have caught the last one, I was kind of trying to write down all the questions. I'll start with the Internet subs. Yes, as I mentioned in the previous question we should see a rebound if you had a mix of seasonality and just the fact that we're trying to chase the right subs. Kind of I said it in the last question but I'll just highlight a little bit, we've launched a self install program. The self install program obviously saves us a lot from take rate standpoint, etc. We're seeing more than double the take rate that we initially thought on that so those are things that we focus on, on how we go after subs. From a competitive environment standpoint I would say that the only thing that's changed, pricing dynamics really haven't changed. I think the change is some of the speed dynamics have changed, spectrum has offered a new 400 meg offer. We countered with a 500 meg offer. It's -- again we said this in the past it almost becomes a speed arms race. But we feel like we have better weapons and especially where we have fiber -- we feel like it wins every time. On the over the top marketing versus our traditional marketing, our over the top product we just launched it so obviously we're going to highlight the fact that we had it, we're going to market it. There are just certain subs that want the traditional package. There are certain subsets that don't want the traditional package. Our goal is to be able to present whatever content package that the customer wants when they want it. And so it's almost moving as much as we can to kind of a utility model of look if you purchase from us you're going to the best internet available period and then you're going to be able to buy from a menu, right. If you went over the top we can help you with over the top. If you want traditional we've got these different flavors of traditional that we will market for your too. So from that standpoint I don't know that we'll have a big marketing push on the over the top. We're going to do it on mortal point of sales from more of point of sales standpoint. And I missed your last question yeah…

[Thomas E. Simpson:]

I did -- got it, so your final question I believe was about enterprise fiber and expectations around growth in that space correct. So, as you saw we reported around 21 million, for the quarter I think 42 million year-to-date. Expectation that really is I'd say over time low single-digit growth. As folks move from legacy solutions to fiber solutions and through that process they're going to need to consume more and more bandwidth we would expect over time the growth rate to be a modest amount of single-digit growth rate.

[Andrew R. Kaiser:]

And just to add to that, the dynamic you see is you're always obviously fighting for customers and through customer relationships, but even when you have customers and they make the migration, you see price compression. People are obviously getting more for less but that's not anything new. So you're going to see the dynamics kind of ebb and flow from slightly down from quarter to maybe slightly up to slightly up to flattish. It's just the dynamics that people make this migration over the next honestly probably few years. There's a lot of legacy out there. You know, think about tactically what companies have to go through to migrate from old copper technology to fiber based technology. It's not easy for them, there is investments on their side and upgrades and so it's just it takes time. We're working with our customers, we have a lot of great relationships with great customer base. But if I were you that's kind of how I would think about it.

[Batya Levi:]

Are you seeing any change in the competition in that sector?

[Leigh R. Fox:]

Not a change, I mean it's always fairly competitive but I'll be honest in most -- in the few markets that we have both here and Hawaii there isn't a huge amount of competition. I would say that where I see a change is on the IT stack. We're positioning ourselves to really win on that side. And if you really think about what we've done we have these networks that we're building that we feel like are superior fiber networks. We're trying to really simplify the view of that not only from a Wall Street standpoint but from a customer standpoint that look you buy fiber you fiber from this group, it is simple it's efficient. We can scale it, we can do whatever you need. We're the best partner because it's the deepest most redundant network. Then to add to that we have moved all the kind of software defined products over to IT solutions and here's the stack we could start to sell kind of on that side. And the good news about that is we -- to me those are the more competitive conversations are on that side. On the network side it is typically, hey I wanted to work. Right, if it works and you had the bandwidth you need for the right price, I trust you, you are the telephone company, I love you. Where it gets competitive is when you start to move to the software defined products and I feel like and as you can see from the metrics that we're seeing a lot of success on that side. So, where I would say we have more competition we're seeing a lot more success.

[Batya Levi:]

Okay, thank you. Operator And next we'll go to Sergey Dluzhevskiy with GAMCO Investors.

[Sergey Dluzhevskiy:]

Good morning guys. Couple of questions so first one on Hawaii, you mentioned that you'll be kind of applying the best sales and marketing practices to kind of from Cincinnati to Hawaii, could you maybe expand on that, provide more color as far as what you already have been doing over the last months and what we should expect over the next maybe 6 to 12 months as you might define the go-to-market approach and sell some marketing practices just in general terms?

[Leigh R. Fox:]

Yeah, I'll actually let Tom answer that one, he is pretty intimate with that, I don’t want to give away our secret thoughts but I am sure he will do the job.

[Thomas E. Simpson:]

Good morning Sergey, so to begin with when you think about the business practice we haven’t since [indiscernible] to maximize cash flow we closely manage where we have fiber construction and fiber installs. In the state of Hawaii we have a lot of fiber constructions that that has not followed up with fiber installed if you will. So with the combination of the call center and sales and field planning we're closely coupling future fiber builds with driving up actual subscriber penetration. So an example is in Oahu and in the neighbor islands in the current term our business GPON penetration is as Leigh mentioned roughly 11% from an activation standpoint. And we are solely focusing on driving that penetration up over the next several months in sales and in cell capacity.

[Leigh R. Fox:]

You know said a little differently what we feel like we've done here over the last several years is really break down what were kind of old telephone companies stylos and really cross communicated integrated in reporting and metrics. From a cash standpoint how things flow operationally through cash from construction to sales. What we saw within Hawaii we needed to take some of that model and really explain it to that team and say here's how we've done it and that closer integration is extremely helpful and what it does is it squeezes installation timelines, sales timelines and it pushes it closer to construction finishes and etcetera, etcetera. So it's almost as simple as that. We sort of show that hey, here's how we did it and it's a great team out there and they have picked up on it, they are real excited and I see a lot of good things happening.

[Sergey Dluzhevskiy:]

Okay, and in terms of capital intensity you are guiding to $40 million to $45 million for Hawaii this year and I think in the past HCOM was pending between 95 million and 100 million year on CAPEX I thing was the best. So, should we think about your capital intensity over the next two years given your strategy and given your approach to Hawaii?

[Andrew R. Kaiser:]

Yeah, I think initially Sergey I don't think it will change much. One of the things we want to do is make sure that you know operations is -- we have operations exactly where we want operations and that team feels comfortable with what's going on and they feel good about what's happening from a sales standpoint and there are opportunities ahead of them both on the consumer and business side. So we'll probably progress slowly from the standpoint of any kind of fiber accelerations but eventually I believe we will, you will see an acceleration of fiber intensity now. I hesitate to guide forward any more than that because one of the things that obviously will start to guide to is you'll see a little bit of a different mix from us from the standpoint of we still will be investing heavily in fiber but as it got more efficient we're pretty confident that we can have a different mix of both investment fiber and the pay down of debt. So until we get to guiding for next year I don't want to say too much more than that but I think for us there really will come down to a combination of two things.

[Sergey Dluzhevskiy:]

That's right, and my last question is kind of a broader question would you a little bit about the recent opportunities that you see with 5G becoming a reality. Obviously it's a risk as 5G [indiscernible] if in an urban markets like Cincinnati but also it's an opportunity for you from getting our business higher perspective from us or aspects of your business. So, maybe how you see it most recent opportunities as 5G becomes a reality.

[Andrew R. Kaiser:]

Yeah, I will answer a little bit now and I am going to hand it over to Tom. Tom is much more technical on that side of the business than I am. And we can get into the technical answer but my thought process hasn't changed yet, but I will be candid. We do a lot of work and studying and questioning around this area. Obviously I think a lot of people are still trying to figure out I read out on what drives this on a weekly basis and watching what all the carriers are doing. I still see this as an opportunity for us in the future. I think if you look at where technology is going in general I think having deep metro fiber will be incredibly important period. You know I think what's beyond fiber is more fiber. So I think for us that's the answer but from a technology standpoint I'll let Tom do it.

[Thomas E. Simpson:]

Sure so when you think about 5G in general between now and the pre-standard rollouts and looking forward as Leigh mentioned deep metro fiber is important. 5G is still a last few thousand feet technology and it requires fiber to that radio. So having fiber deep into a neighborhood allows 5G penetration to occur. As we look at it as a competitive threat in Cincinnati or the state of Hawaii there is some potential for competitor threat but I look at that as offsetting that business with wholesale. If you look out ten years it it's probably a transition from a retail business to a wholesale business. We're not necessarily direct to consumer on a portion of our market so we're not having to deal with things like churn and whatnot. We're just doing contractual backhaul. In the state of Hawaii there are geographic and vegetation difficulties with 5G so it remains to be seen. Either way terrestrial fiber, metro fiber is very important.

[Leigh R. Fox:]

And again I will just -- I will highlight, I think this is an area of -- I mean unknown for a lot of us, right. But we continue to study and we do look at it as more of an upside. I've read things around the potential cannibalization of retail broadband. I tend to not believe that yet because I look at how consumers around me consume including my family. But that's that, I do think it's going to be a huge augmentations and mobility bandwidth and so how that plays out. We're just going to try to stay as flexible as possible to Tom's point on kind of combination of wholesale retail. We have great partnerships with our carriers so we try to stay very flexible with our partners. And we were just going to try to shift as the market shifts but the bottom line is we have that underlying asset that we think is valuable for many, many years to come. And I think it really differentiates us from others. For the markets that we have I think we're truly differentiated.

[Sergey Dluzhevskiy:]

Thank you guys.

[Joshua T. Duckworth:]

Thank you.

[Operator:]

And that does conclude today's question-and-answer session. I will now turn the call back over to our speakers for any additional or closing remarks?

[Leigh R. Fox:]

In closing I would like to reiterate my appreciation for the continued feedback and input from our shareholders. Now that we have closed the merger with Hawaiian Telecom we are no longer restricted from being able to share our outlook and enthusiasm around our two businesses and I look forward to seeing many of our current and potential survivors and person during the second half of 2018 and into 2019. Lastly I would like to officially welcome everyone at Hawaiian Telcom and take a moment to thank the entire Cincinnati Bell extended family for their hard work and continued commitment to our strategic transformation. We have a lot of work ahead of us but I'm thrilled about the future opportunities for this company and I look forward to updating you on the progress next quarter. Thank you for joining us today and for your continued interest and support. Have a great day.

[Operator:]

And that does conclude today's conference, we thank you for your participation, you may now disconnect.