Cincinnati Bell Inc.
Q4 2018 Earnings Call Transcript

Published: 14 Feb 2019

[Operator:]

Good day, everyone, and welcome to the CBB's Fourth Quarter 2018 Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Josh Duckworth. Please go ahead.

[Josh Duckworth:]

Thank you and good morning. I would like to welcome everyone to Cincinnati Bell's fourth quarter 2018 earnings call. 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 our 2018 highlights and provide an update on our strategic initiatives. Andy, will then provide detail on our fourth quarter financial performance by segment and our 2019 guidance. Following the prepared remarks, Tom Simpson, our Chief Operating Officer will join Leigh and Andy for the question-and-answer portion of the call. Before we proceed, let me remind you that our earnings release presentation and financial statements are posted on our Investor Relations website. In addition, if you would like to listen to this call at a future time, a tape recording will be available on the website starting today at noon. 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. This presentation also contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are also available on our website. With that, I am pleased to introduce Cincinnati Bell's, President and Chief Executive Officer, Leigh Fox.

[Leigh Fox:]

Thanks, Josh and welcome everyone. Thanks for joining us today. 2018 marked the end of a very transformational two-year period for Cincinnati Bell. We've successfully integrated OnX and closed the merger with Hawaiian Telcom. We have reorganized the business and now manage two distinct yet complementary businesses, an IT Services business with a diverse customer reach and growing recurring revenue base and a network business with two attractive fiber-centric footprint with growing Internet market share. We achieved all of this while also delivering strong operational performance in achieving our 2018 financial guidance. As noted on slide 5, consolidated revenue totaled $1.4 billion for the year generating adjusted EBITDA of $372 million and positive free cash flow. Moving to our IT services business. Our strategy for 2018 was simple. Creating a company that addresses the IT and networking needs of commercial enterprise client beyond our network footprint. As many of the network products have become software base, we identified an opportunity to begin adding value to clients regardless of location with a full stack of products from simple hardware sales to managed voice and software-defined network management. To accomplish this, we need to take our carrier grade commercial and enterprise solutions traditionally sold within our footprint and significantly expand our reach. I am pleased to tell you the strategy is working. The October 2017 merger with OnX created instant scale by providing access to 15 additional North American markets and 500 highly trained IT professionals. We also diversified our customer base by adding 2,000-plus new logos to sell our strategic IT Services across our expanded geographic footprint. Through a combination of selling our services to existing OnX customers and adding new logos, our recurring revenue services accounted for more than 25% of the gross sales of that segment in 2018. This is an incredible achievement for a company that was typically considered a traditional value-added reseller. In addition, we recently examined our top 200 customer relationships which accounts for a significant percentage of our annual IT Services and Hardware revenue. Of these customers, 85% purchased an IT Hardware product, and nearly 50% purchased a Consulting services. But what I believe this is even more impressive is that within these 200 customers approximately 40% purchased a communications solution with 30% purchasing a cloud-based solution. These latter two products are incredibly sticky and move our relationship with customers well beyond transactional interactions. We remain particularly encouraged by the growing demand for our Communications and Consulting services. During 2018, the communications practice secured multi-year engagement with a total contract value of more than $165 million to be realized over the next three or five years resulting in $2 million of monthly recurring revenue. Our Consulting practice also realizes an uptick in demand as we established a new relationship with the Fortune 10 enterprise and added resources to two Fortune 100 customers. In total, billable resources increased approximately 17% year-over-year, generating full year revenue of $165 million with consulting practice. The growing demand for our strategic IT Services has also expanded into our Hawaiian market. Our extensive portfolio products has provided the Hawaiian Telcom team the platform needed to further develop existing relationships and identify new opportunities in underserved market. Since the merger with Hawaiian Telcom on July 2, we have made significant strides toward realizing our synergy target and our operational objective. As a result, adjusted EBITDA has now increased for two consecutive quarters. Looking ahead, we expect adjusted EBITDA to grow 5% to 10% in 2019 as ongoing operational efforts remain focused on increasing Internet penetration and improving product delivery and customer service. Additionally, the merger with Hawaiian Telcom was the important step toward building scale and locking in fiber density value for shareholders and customers. As we continue to anticipate and capitalize on the growing demand for speed that only have fiber network can provide. We are confident that dense fiber will increasingly be a market differentiator. And our continued investment in fiber networks will further differentiate us from our like peers. We simply have better assets. To illustrate the distinction between our assets and those of our peer group, fiber-to-the-premise has been constructed to approximately 60% of the addresses in Cincinnati and 50% of the addresses on the island of Oahu, which is home to one million residents. Contract this with our next closet peer, which is only able to offer a 100-megabit Internet product to slightly more than 25% of its address. Our fiber investments resulted in both Cincinnati and Hawaii increasing their Internet market share year-over-year. As additional evidence of these accelerating demand for faster Internet speeds more than 50% of Cincinnati's Internet customers subscribed to speeds greater than a 100-megabit compared to two years ago when only 20% subscribed to such speed. Ultimately, Cincinnati Bell and Hawaiian Telcom’s distinctive brand and superior assets provide each the means to capture current market share and future value from data intensive bandwidth standard. With that, let me turn the call over to Andy, who will review our fourth quarter earnings results and provide additional details about the segment performance and financial outlook for 2019.

[Andy Kaiser:]

Thanks, Leigh. Starting on slide 6, consolidated revenue totaled $399 million for the quarter with adjusted EBITDA totaling $108 million. Both revenue and adjusted EBITDA were up approximately 3% sequentially on stronger IT service revenue, resulting from increased demand for consulting and communications services as well as seasonally high infrastructure sales. Turning to slide 7. We've highlighted our Entertainment and Communications segment results for the quarter. Contributions from the merger with Hawaiian Telcom resulted in fourth quarter revenue of $252 million, and adjusted EBITDA totaling $91 million. Compared to the third quarter of 2018, revenue decreased less than 1% as growth in Consumer/SMB Fiber and Enterprise Fiber partially offset continued legacy declines. Total entertainment and communications adjusted EBITDA remained consistent with the prior quarter, as merger-related synergies offset the slight decline in revenue. Additional details regarding Consumer/SMB Fiber revenue also referred to as Fioptics in Cincinnati and the related metrics have been included on slide 8. In Cincinnati, Fioptics revenue totaled $87 million for the quarter, increasing 8% year-over-year, as continued strong demand for higher speed Internet solutions and ARPU growth mitigated video subscriber declines. We ended the year with 239,000 Fioptics Internet subscribers, up 12,400 from a year ago, which include the combination of fiber-to-the-premise and fiber-to-the-node customers. Video subscribers declined 6,600 during 2018, ending the year at 140,000 as customer preference shifts towards over the top program. Video ARPU for the quarter totaled $96, up 9% year-over-year. As demand for faster Internet speeds continues to accelerate, our fiber to the premise offering is proving itself for superior product to the competitors offering as well as our fiber-to-the-node product. During the year, we added 22,000 fiber to the premise Internet customers, including 4,700 in the fourth quarter. Fiber to the premise Internet penetration increased to 43% during the quarter, with churn improving slightly from prior year to 1.6%. Fiber-to-the-premise Internet ARPU for the quarter increased 4% from a year ago, totaling $52. In Hawaii Consumer/SMB Fiber revenue totaled $22 million, up 3% sequentially. During the fourth quarter Hawaiian Telcom added 2,100 fiber to the premise Internet subscribers with penetration rates increasing to 31%. Total Internet subscribers remained consistent with the previous quarter, while ARPU increased 9% to $37. Video subscribers remained flat at 49,000, resulting in penetration rates of 20%. Video ARPU decreased slightly to $79 during the quarter, due to an increased involved activations. Turning to our IT Services and Hardware segment on slide 9. Revenue for the quarter totaled $154 million, up 16% over the prior year, and 9% sequentially, including a $10 million of contribution from Hawaiian Telecom. Each of our four fracts is contributed to the revenue growth with infrastructure solutions being seasonally stronger in the fourth quarter. Consulting revenues results were impressive, growing 8% during the quarter due primarily to an increase in billable resources. Our strong revenue results generated adjusted EBITDA totaling $20 million for the fourth quarter of 2018, which was up 34% year-over-year and 15% compared to the previous quarter. As highlighted on slide 10, we continued to be encouraged by the strong demand for our UCaaS SD-WAN and NaaS offerings within our communications practice. Excluding contributions from Hawaiian Telecom, communications revenue increased by 4% during 2018 due to the 26% growth in strategic projects more than offsetting legacy decline. During the quarter, we more than doubled our NaaS locations and increased SD-WAN locations by 65%. We also added 16,000 hosted UCaaS seats since the third quarter of 2018. And now manage nearly 240,000 profiles including approximately 24,000 in Hawaii. Turning to our financial position on slide 11. Free cash flow for the year totaled $41 million, up $13 million from the prior year primarily due to full year contributions from OnX as well as contributions from Hawaiian Telecom since the close of the merger. Consistent with the prior quarter we ended the year with net debt of $1.9 billion resulting in leverage of 4.6 times. Our current capital structure and ability to generate positive free cash flow is more than appropriate to execute our long-term growth strategy as our liquidity at year-end exceeded $200 million and we have no significant maturities due until 2024. As a reminder, we also maintain a gross net operating loss carryforward of approximately $650 million which will defray any federal tax obligation into the foreseeable future. As presented on slide 12 full year capital expenditures totaled $221 million including $44 million for Hawaiian Telcom. For the full year of 2018, we invested $99 million in our Fioptics Suite of products building fiber-to-the-premise to 41,000 new addresses. As a result, Fioptics is now available to 611,000 homes and businesses or approximately 75% of Greater Cincinnati. In Hawaii, Consumer/SMB Fiber is available to approximately 222,000 addresses on Oahu covering more than 65% of the island, while only 12% of the 160,000 total addresses on the neighbor islands have been upgraded with the fiber product. Heading into 2019, we are planning to remain free cash flow positive while continuing to identify opportunities to expand our fiber-to-the-premise footprint to residential and commercial addresses with the highest return profile. As illustrated on slide 13 we expect capital expenditures will be $215 million to $235 million for the company including $60 million to $70 million for Hawaiian Telcom. Interest payments are expected to be $130 million to $140 million in 2019 with contributions to our pension and post-retirement plans ranging from $15 million to $20 million. We are anticipating full year 2019 revenue to be $1.515 billion to $1.575 billion. And forecasting adjusted EBITDA to be $400 million to $410 million. These targets include Hawaiian Telcom's revenue and adjusted EBITDA contribution of $350 million to $360 million and $95 million to $100 million respectively. In previous communications, we have discussed the challenges and headwinds faced in the cloud practice within our IT Services and Hardware segment due to an in-sourcing initiatives at one of our largest customers. Our 2019 guidance has conservatively quantified the potential impact of these efforts to reduce adjusted EBITDA by $15 million to $20 million as compared to 2018. We continue to maintain a close relationship with this customer providing the opportunity to win projects within the entity's various business units. With that, I'll turn the call back to Leigh for closing remarks.

[Leigh Fox:]

Thanks, Andy. 2018 was undoubtedly a challenging year for our sector. However, our superior assets, brand equity and customer relationships, combined with our early decision to accelerate our regional fiber built of both Cincinnati and Hawaiian have created unique networks capable of producing higher bandwidth and faster Internet speed than our competition, significantly differentiating Cincinnati Bell from our historical peer group. In addition, within our IT service segment, we now deliver flexible end-to-end solutions to customers across North America. Our diversified services portfolio has created a competitive and innovative platform driving significant recurring revenue across our expanded footprint. In closing, we remain committed to growing our two distinct businesses as we drive towards increasing valuation multiples associated with our expanding fiber-rich network and our IT services business. Our strategic transformation, combined with our disciplined capital allocation and sharp focus on execution has positioned Cincinnati Bell to capitalize on industry trends to deliver long-term shareholder value. I will now turn the call over to the operator and open it up for Q&A.

[Operator:]

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

[Simon Flannery:]

Thanks a lot. Good morning. Leigh, you talked in the past about the some of the parts value of the company and potentially considering separations of the IT services. Could you just update us on those plans? And then on the customer in-sourcing, is that impact likely to be linear through the year? Or is there some kind of lumpiness through that? Thank you.

[Leigh Fox:]

Thanks, Simon. Yes. So an update on CBTS. I think we've done pretty much all we can do to separate the organizations, both from a financial reporting standpoint and an organizational standpoint. At this point, we're looking to execute in both of our segments and whether the right time to sell it is tomorrow or three years from now, I think, we'll determine that as time goes on. I think the important part is, our job was to highlight the value that I think we have in that segment. And honestly, I think, the kind of the brilliant maneuver that we made. And if you really think about it, what CBTS represents is if you look at a traditional, call it, a national teleco, pick one of the national guys that are much larger than we are in our sector. So pick a name. Typically, the product that we sell and in fact, I think, we have a more complete and deep product set than most of our peers. They sell those within their business units, either in commercial group or an enterprise group. What we've done, given our limited geography of our network was, basically take those products and separate them out into different entity. And now we're not constrained by geography, right? So as we sell network type products in our geography that are connected to our fiber network, we now have the ability to go, take those commercial and enterprise products in even a more robust stack of products within the segment and sell to commercial enterprise clients across North America. So that’s what we're going to focus on. We have the ability to spin that company out at any point if value dictates that we should. But right now we're focused on growing it. I'm incredibly happy with the momentum. That company has got a lot of tailwind behind it. So I'm looking forward to what 2019 brings. I'm sorry, what was your second question?

[Simon Flannery:]

It was on the GE, yes.

[Leigh Fox:]

Yes, sorry the trends of GE. It's probably going to be a lot more focused on the first half of the year. We should see a trend to out sort of in the first six months. One of the things we struggled with was timing. With the range that we gave on guidance that's in my mind, worst case scenario. It will be no worse than that range. We were working with this customer, they are insourcing this product. We're working with them; better understand timing to help them as much as we can. But it is -- timing is a bit of a unknown. But if I were to model it, I would model it out in the first six months and then it sort of normalizes past that point.

[Simon Flannery:]

Okay. So, it's possible it might not hit in Q1?

[Leigh Fox:]

Yes, I would somehow doubt that it will all hit in Q1.

[Simon Flannery:]

Okay, great. Thanks a lot.

[Operator:]

We'll take our next question from David Barden with Bank of America Merrill Lynch.

[David Barden:]

Hey, guys. Thanks for taking the question. I had a couple -- first one was -- thank you for the CapEx detail in the legacy Cincinnati business. I guess the expected run rate of Hawaii is going to tick down pretty substantially from what we saw in the last six months of 2018 into next year. If you could kind of elaborate a little bit on what's driving that? And then related to the CapEx question is I think you've kind of made a statement about the expectations for more fiber coverage in targeted economic areas. I wonder if you can kind of size that a little bit in terms of what the goals are now with that throttle to capital expenditures. And then lastly kind of gauging your optimism on at 43% penetration in the Cincinnati market, kind of, how easy is it to kind of continue to grind that number higher in the competitive climate where you're kind of closing in on -- what we would assume would become a more of a natural 50-50 market share? Thanks.

[Leigh Fox:]

Thanks, David, appreciate it. With respect to the HCOM CapEx run rate, I think what you should expect is we'll continue to invest in fiber build, but the reason you're seeing a slight tick down is as we had mentioned in prior calls, from an operational standpoint, we'd like to align the operations of Cincinnati and Hawaii in the cross-functional disciplines. And really ensure that we're thinking about the world the same way across territories. That work’s already begun and it's going very well. And I think you see that in the results. But one of the things we didn’t want to do, we didn’t want to just jump into spending capital without being convinced that we're doing it in the most optimal way. And so I think that's what you see in 2019. So, we're going to assess progress as we go and make sure that we're seeing everything from the ARPU that we expect to the penetration we expect and then assess as we move on which I think is the financially prudent and operationally prudent thing to do. From a goal standpoint, and I think this relates to the penetration question. I think we're at a point as a company where we have pretty deep metro fiber. And one of the things that we focus on is with both markets at slightly over 50% or over 50%, one being greater than other. But both being over 50% fiber-to-the-prem, to your point on penetration, we're going to start to focus on what is the right type of penetration. And I think you heard us talk last year about the right types of customers, but we weren’t going to chase vanity metrics. We weren't going to change unprofitable subs. This year there's going to be a focus on pace and what are the right types of subs. You're still going to us attack subs. I think you're going to see Internet growth. But it really is learning as supply and demand for fiber-based speeds shifts and changes. One of my concerns is being too far ahead of demand with supply. And so we see in the next three, five years -- three to five years, the landscape changing immensely from a data user standpoint. But at the same time, I don't want to be too far ahead of that from a capital expenditure standpoint. And so we will be focusing on hitting the right neighborhood to your point. Making sure we're getting the right type of subs. And what that might mean is us pressing the bounds of your point on what does -- what is the bound of our penetration. I don't know that it's a 50/50 market to be honest. I think with our assets and as a demand shift with the assets we have, I think over time we can be a net winner in the market and be over the 50% share of the markets that we're in simply based on the assets. And so that's what we're going to test. But we're going to do it in as prudent way as possible. Obviously look I could sit down and we could build business models to say let’s just build fiber as aggressively as possible, but you know as well as I do what that means is. Your debt increases and more underlevered, but we had a more of these debt assets and we have very good assets. And so it's sort of a wait and see and hope it comes, and right now we feel like we're in a very good position. We have very good assets and now the prudent thing to do is to really start to be measured about how we buildout from this point and make sure that we’re seeing the results that we expect especially as you see this demand shift over time. So, hope that makes sense but that's how we're thinking about the world.

[David Barden:]

Thanks, Leigh.

[Operator:]

Our next question comes from Batya Levi with UBS.

[Batya Levi:]

Great. Thank you. First on the exposure to that large customer. Can you also provide a range for the revenue exposure we should think about? And you mentioned that we shouldn't expect anything beyond that. Have we seen some of that pressure already in – showing up in 2018 numbers? And then a follow-up on the CapEx. Can you just help us think about what your CapEx guidance assumes in terms of fiber reach in Cincinnati and Hawaii? Maybe in Cincinnati, is it like half of the buildout we saw in 2018 about 20,000 homes? And in Hawaii where would that coverage get us by year end? And just last question, maybe an update on the competitive environment and especially in Hawaii. I believe you mentioned that term picked up a bit. Can you talk a little bit more about that?

[Leigh Fox:]

Yeah. Thanks, Batya. With Respect to GE, I would say that the revenue range as it matches guidance would be call $25 million to $30 million in that range. I'm probably pretty close. From a build result, I think you're exactly right on Cincinnati. We're probably 15,000 to 20,000 homes. And in Hawaii we're 5,000 to 10,000 utilizing caps and other different financing mechanisms. So that's probably what the landscape looks like. With respect to -- I guess your last question with respect to churn in the competitive environment. We haven't seen a massive change in the competitive environment. It's been pretty consistent. I would say the one change that we saw this year was the obvious addition of a mobile product from our competitor. But I'm not sure that that's driven anything incremental from the result standpoint. Fiber churn looks good. I think if you see any difference in churn, it really comes down on the fact that BDSL churn is increasing. So fiber-to-prem churn looks great which is again why you're seeing a lot of our processor in discussion, switching over to talking about fiber-to-the-prem more than we talk about anything else. We're really considering the BDSL now as a legacy type product just because of the baseline speeds. So I would say that, if we saw any difference in churn it was around the BDSL products which we expected. And again that's why we focused on to the prem-build.

[Batya Levi:]

Okay. Thank you.

[Operator:]

Our next question comes from Sergey Dluzhevskiy with GAMCO Investors.

[Sergey Dluzhevskiy:]

Good morning guys. My first question is on integration, so you had the Hawaiian Telecom obviously for over half a year now. So maybe if you could share how you are executing against your integration focus areas, like field the network optimization, bringing efficiency, reducing churns. Obviously, we’ve seen EBITDA improve sequentially. And you also mentioned that you need to further align operations between Cincinnati and Hawaii so may be at a high level, if you could talk about what does it entail in 2019 and beyond?

[Leigh Fox:]

Thanks Serge. Thanks for the question. Yes, I think it's going really well. I think you said it, honestly you answered your own question. The results are in the EBITDA growth that you see. I think when we announced that merger. I mean, there was a lot of question on when you see consecutive quarters of decline, what could you do with this asset and what would it look like? And we were pretty confident that we could stabilize it and reverse trends. And that's exactly what's happened. So it's going well. The team is doing really well in Hawaii. I'm really confident with the team we have and I'm looking forward to some good results in 2019. So from that standpoint everything is going very well. From the standpoint of operations, I think it's as simple as pricing right? Pricing parity. Making sure that pricing methodology is the same. Build methodology is the same. I mean you kind of take the transaction -- transactional items in any operations and you start to break down every piece of it and what we're doing is we're working with the teams and make sure that we have consistent thought process while also considering the differences in the geographies. So the business environment as an example might be a little different than the business environment in Cincinnati. So we're making sure that those teams understand as we look at business customers. Here's how we consider business customers, while taking into account their environment. Same with consumer customers, while taking on the consumer side and to account the fact that, the MDU SFU mix is different than what it is here in Cincinnati. So it really is just aligning those methodologies and then as we look at build what have they done, educating ourselves on what they have done and how that performed? And then looking at that opportunities and where the best opportunities are at least, initially as we marched teams together and teams become familiar with one another. Again the results have been fantastic. I'm encouraged by everything that's been done. I think we've got some tailwinds behind us. So I'm looking forward to what 2019 brings. And we've got a lot of opportunities on the business side. And then on the IT front, I think that's -- we said in the script, I think that's a completely untapped market. And we have a lot of opportunities on that side too. So I'm really looking forward to what 2019 brings.

[Sergey Dluzhevskiy:]

Right. And my second question is on 5G. And obviously we're seeing larger wireless carriers getting close to launching 5G and experiments with six mobiles, as Verizon launching a product in full markets. So have any developments on the 5G front over the past six months or so changed your view on the recent source of opportunities that 5G presents to Cincinnati Bell? And if you could share your latest thinking on the subject, that would be great.

[Leigh Fox:]

Yes, thanks. Great question. And honestly, this is subject I get personally involved in every week. And I think -- I don't know that my viewpoint has changed. I still think it is an opportunity. I think it can be a risk in some areas of the business. But I think overall it’s a massive opportunity, both for where we have assets. And honestly everywhere in the country as this infrastructure is deployed. How it impacts financials, I mean, we're standing pretty close to conversations around deployments and technology shifts. And when I say that, I mean, everything from we're meeting with chipmakers to product developers to carriers and sellers and staying very connected with what the plans are and the current thought processes. I'm not convinced that it's a fixed wireless is a broadband replacement. What I am convinced in, is that it will drive technology shifts and an increased demand for speed and data usage, based on the deployment of products that will come around, having a robust infrastructure. And kind of the easy things to think around that are autonomous vehicles augmented reality. We've seen some pretty cool products around augmented reality and what can do to life going forward. So I'm encouraged by the fact that, I think, data usage is going to increase exponentially. And if you look at some of the trends and predictions on that, it shows, the predictions show that. And the other thing I'm encouraged by is that historically whenever we've tried to predict data usage in the future we've been grossly off and conservative. So I think that same thing is going to happen. So the way I look at it is, data usage is going to explode over the next three to five years and having a robust deep metro fiber asset in two areas. Especially, in one if you think Hawaii, one that's not easy to build in, right? And so, we've got a very unique asset in Hawaii as data explodes. It's not easy to build in Hawaii. And we've got over 50% of island Oahu built. And we're building other islands through CAF. And so, we're in a very unique position to take advantage of some of these trends. So that's where my head's at right now. But I'm keeping my finger on the pulse of everything as much as I can.

[Sergey Dluzhevskiy:]

Thank you.

[Operator:]

Our next question comes from Davis Hebert with Wells Fargo.

[Davis Hebert:]

Good morning, guys. Thanks for taking the questions. Along the same lines, the Enterprise Fiber division, I think you reported $30 million of revenue this quarter. What's your outlook for that segment? How should we look at that, the total addressable market? Is that going to be pretty predictable driver of revenue this year?

[Leigh Fox:]

I would say, I always view that area as somewhat kind of flat to slightly up. The challenge is, we're effectively migrating customers, right? When you are the 90-pound gorilla, when it comes to fiber infrastructure in the areas that you have infrastructure. A lot of what you're dealing with is the transition of the legacy products into more robust fiber-based products. And honestly they're buying on a bandwidth standpoint, they're getting more for less, right? So, they're getting bigger pipes for less cost from a negative standpoint across – of cost from a negative standpoint. So, I always view it as it's consistent, but it's not -- I don't expect robust growth. It's almost like tell salespeople their jobs are hard because it's almost like they're on a treadmill running pretty fast to stand still. But that treadmill's incredibly important, right? We have got to help those customers transition to upgraded infrastructure, so that's what we do. And we have great relationships and we'll continue to help customers migrate.

[Davis Hebert:]

Okay. Thank you. And then on the GE issue just thinking longer term, I mean, is there any reason we should expect another impact in 2020? And do you still view the $100 million EBITDA I mean granted I know that's several years away perhaps, but you still -- do you think that's achievable?

[Leigh Fox:]

Yes. So, I absolutely do. I think -- and I don't expect anything like this to happen together. I mean I look at our overall portfolio. And we knew that this was an incredible relationship and an incredible product that we've been very successful with. And honestly successful with them, it's been a great product for them. We've done everything we can as a vendor to try to keep that relationship with that specific product. But ultimately they've decided to in-source it which I completely understand. But I don't see any exposure like it anywhere else. It was fairly unique. So, going forward, I think we have kind of normal business risk I would call it. But beyond normal business risk, I think we have incredible products and an incredible opportunity within CBTS. And as I described earlier, the opportunity that we have is -- the footprint that we now sell in is much larger than the footprint that you traditionally think about with Cincinnati Bell. And I think that's -- I don't know that people have necessarily wrapped their head around that, right? And I think you're going to see that in the results. So, yes, I think a $100 million is absolutely doable and that's doable on an organic basis. Obviously, that's not going to happen in 2019. It's going to take us some time, but I see great opportunities with CBTS and incredible momentum going forward. So, yes, I'm really encouraged and once we get past this and kind of normalize this issue, I'm really encouraged.

[Davis Hebert:]

Okay, that's helpful. Last question, we saw CenturyLink take their leverage target down to a much lower level. And your leverage seems to be in a concern across the sector itself. You guys are at 4.6 times Andy pointed out. And you do have runway, but how urgent do you see the need to reduce leverage and get to more conservative balance sheet position? And can you repurchase bonds as a way to do that? Thank you.

[Leigh Fox:]

Yes. Thanks. I think -- so we're obviously focused on leverage. I mean it is absolute issue I think within our sector. And the reason it's an issue is that we're in a capital refresh cycle as a sector, right? And so I think what we're doing as -- from a build standpoint being prudent not levering backup aggressively in order to build fiber. I think it's the prudent thing to do. At the same time I'm not super concerned about the long-term outlook because we're putting good assets in the ground. And I think the concern around leverage in our sector has everything to do with the fact that for the most part you see businesses with income statements that have products that are effectively failing, right? They haven't invested in the future. I don't feel that way with us, right? We've invested in the future. I think we have very good products both on the consumer side we're well-positioned. And on the business side, I think we're incredibly well positioned, right? We've invested in things that I know for a fact other organizations in this sectors don't have, right? And so I look at the future and unfortunately, we're a really nice house in a bad neighborhood, right? And I can't help that because we're small people just compare us to the big guys automatically and say why are you are any different, I don't see why you are any different. They just sort of make a decision and move on. You and I have had discussions in past about how we are different. And so I focus on that. I focus on making sure that our revenue run rates, our profit run rates look appropriate. And that we have enough runway to pay the interest and invest, and if need be we de-lever. Now that said, I also am a big fan of optionality, right? And so if I ever do get into a bind, where oh my gosh let's say its 2023, nothing is changed in the environment and we need to delever. Look I have assets that you can spend which is one of the reason why we did what we did with CBTS to show the world that look we've got great asset here. And we're going to grow these assets and if we ever get into an issue where leverage does become a thing I can spend one of the assets and it will have a profound effect on our balance sheet. And so I look at our optionality, I look at the type of assets we have both from an infrastructure standpoint products, I look at our run rates and I look at how our ability has been to execute against our plans and really counter a lot of the legacy declines they're just reality in our sector. And I think we're incredibly well positioned. So I look at the other guys and what they announced and I get it. And I get why they do it. But we're a different animal. And we're going to run the company as prudently as we can from the standpoint of mixing short-term results with long-term needs. And I think we're doing it very well.

[Davis Hebert:]

Great, Thank you, Leigh.

[Operator:]

We'll take our next question from Stephen Sikora with Aetna.

[Stephen Sikora:]

Thanks for taking the questions. First on HCOM in the past you've stated that one of the best practices you wanted to bring to HCOM was better aligning completing fiber construction with selling and installing. So, can you give an update on the HCOM fiber builds that you've done so far in 4Q 2018 and into 2019? Have you started to implement those practices and are you seeing higher initial penetration as a result? And then second on CapEx in Cincy you passed 6,000 more homes with fiber-to-the-prem in 2018 than original guidance, but the fiber optic CapEx was in line with guidance. So can you talk a bit about the – what contributed to the outperformance in terms of homes passed? And do you see those trends continuing in 2019? Thanks.

[Leigh Fox:]

Thanks Stephen. I am going to actually going to turn this over to Tom and let him answer this one.

[Tom Simpson:]

Hey, Stephen. This is Tom Simpson. Couple of things. So with regards to Hawaiian Telcom with the capital expenditures we had in 2017 and 2018 that we inherited the major focus for the team out there was to increase fiber penetration. And I think we start to see that trend shortly after close. So there are a lot of business fiber doors built on a lot of the neighbor islands. And we've increased that penetration single-digit percentage. And we'll continue to see that penetration grow upwards of 23% this calendar year. And I consider that very successful, it was in the teens. In the consumer fiber business, we've also been focused on success-based capital and that is the major focus for 2019 and Hawaii is increasing the fiber penetration on non-bulk doors, as there is underpenetrated market areas that we're focusing on. Part of that focus has been largely increase service. So, we're talking sales intervals to insulation times increasing, or decreasing that to just a few days. Decreasing our repair intervals where we, the team did a tremendous job where we had several thousand open repairs that we're a week or more out in beginning of 2018 and it's really less than a couple going into 2019. And with those things we see the demand is a strong and now we're able to follow-up with the sales activity. So that's good for the team. I'm sorry, what was the second question with regard to capital efficiency in Cincinnati. Yeah, with Cincinnati, we found, as we look at the customer lifetime value of our fiber build end market, we're certainly looking for, we look for pockets of areas that have the best yields from a build-and-return activity. So, we're simply more efficient this year and that's really the strategy for 2019 is building as efficiently as possible. We're not doing anything crazy like a shallow trenching or anything like that, like some of our other folks that have abandoned markets. It's still good old fashion pick and shovel or hanging fiber. But we're doing it exceptionally efficiently.

[Leigh Fox:]

Yeah. And just to add to that, I mean you guys are also doing a lot on the install efficiency. We've migrated a lot of customers to self install, which has had incredible effect on capital efficiency. And that's also one of the things that we hoped to bring to the Hawaiian market. And that has a profound impact not just on the current year, but on your kind of longer run, long-term run rates. And what that means is spending less capital on install, you can ship that capital over and do more with the installation, so that's part of it.

[Tom Simpson:]

Yeah. Self installation has been a big impact in 2018 in Cincinnati and will impact in Hawaii in 2019. And the focus for both the teams in 2019 is again increase the fiber penetration on the doors that we've passed and hard to shift more of our video product to more software defined. So we're not deploying set-tops [ph].

[Stephen Sikora:]

Great. Thanks guys.

[Leigh Fox:]

Thanks, Steve.

[Operator:]

And that does conclude our question-and-answer session. I would like to turn the conference back over to Leigh Fox for any additional or closing remarks.

[Leigh Fox:]

Thank you. Thanks everyone for joining. 2018 was a great year in moving our strategic vision forward. I'd like to thank our 4,300 employees for the incredible work they've done over the last two years. I look forward to applying that same energy and focus to accomplish our goals and objectives in 2019 and beyond. Thanks again for joining the call today. And thanks for your continued support of Cincinnati Bell. Have a great day.

[Operator:]

And that does conclude today's presentation. Thank you for your participation. And you may now disconnect.