Cincinnati Bell Inc.
Q4 2017 Earnings Call Transcript

Published: 15 Feb 2018

[Operator:]

Thank you for standing by. Good day, and welcome to the Cincinnati Bell Fourth Quarter 2017 CBB Earnings Release Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Josh Duckworth. Please go ahead sir.

[Josh Duckworth:]

Thank you, and good morning. I’d like to welcome everyone to Cincinnati Bell’s fourth quarter 2017 earnings call. Before we start, let me remind you that our press release and presentation slides for today’s call are posted on our Investor Relations Web site. Today’s call is being recorded 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 presented on slide two. 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 8K 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 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 our highlights and segment performance for the fourth quarter and full year of 2017. Andy will then provide additional detail on our financial performance and 2018 guidance. Following the prepared remarks, Leigh, Andy and Tom Simpson, our Chief Operating Officer will conduct a question-and-answer session. With that, I am pleased to introduce Cincinnati Bell’s President and Chief Executive Officer, Leigh Fox.

[Leigh Fox:]

Thank you, Josh and good morning everyone. Thanks for joining us today. I’m going to start by giving you a recap of substantial milestones in 2017 achieved as we execute on our strategy of building two distinct complementary business lines with the focus on creating platforms with substantial cash flow. In our enstertainment and communications business, the early decision to invest in fiber has once again generated both revenue and adjusted EBITDA growth. In an effort to capitalize on the growing demand for our Fioptics suite of products, we expanded our network to reach 70% of the homes and businesses in greater Cincinnati, making it one of the most dense and competitively advantaged fiber networks in the country. As our expansion of the fiber strategy, we believe the combination with Hawaiian Telcom provides us an opportunity to replicate Cincinnati Bell's success across the state of Hawaii. Together, the combined networks will exceed 14,000 fiber route miles, reinforcing our ability to win with fiber and capture market share. In the IT services business, we continue to advance our digital base service products, such as unified communications as a service or Ucaas, as well as introduced new technologies such as SD-WAN and network as a service. The acquisitions of OnX and Suntel, immediately transformed CBTS from a regional IT company to a North American hybrid cloud service provider with the breadth and scale required to compete effectively in an everchanging IT services space. Importantly, the acquisitions bring an attractive 2000 plus customer base, adding diversification and tremendous cross-selling opportunities as customers increasingly migrate to software based cloud solutions. We also made significant strides improving the health of our balance sheet ,providing us with ample financial flexibility and liquidity to execute on our strategic initiatives. In the first quarter of 2017, we successfully sold our remaining stake of CyrusOne, including the IPO in January of 2013, proceeds from the monetization of CyrusOne totaling $1.8 billion have been used primarily to repay debt and significantly improve our leverage ratio. In addition, we refinanced the new credit facility agreement and completed all necessary acquisition financings in the beginning of the fourth quarter. These achievements have increased our runway for growth and value creation across our two distinct business units, which now have appropriate scale, organizational structure and leadership committed to driving the respective brand forward. Now, turning to full year 2017 results. Our revenue for the year totaled $1.29 billion, slightly below guidance range due to the declining lower margin hardware sales. We generated adjusted EBITDA of $303 million and positive free cash flow of $28 million, both in line with our financial guidance. Moving on to slide six. Consolidated revenue for the fourth quarter of 2017 was $427 million compared to $285 million in the prior period. Adjusted EBITDA was $78 million for the quarter, up $4 million from a year ago. Total strategic revenue in the fourth quarter was $201 million. For the full year of 2017, we generated strong strategic revenue of $705 million, an increase of 11% compared to 2016. Moving to our quarterly segment performance for entertainment and communications, starting on slide seven. Again, our early decision to accelerate our regional fiber build has created a unique network, capable of continually producing higher bandwidth and faster Internet speeds than our competition. Today, our fiber density footprint differentiates us from traditional carriers and allowed us to overcome legacy declines each quarter of 2017. Strong demand for fiber based products drove a year-over-year increase in strategic revenue of 11% and 15% for the fourth quarter and full year respectively. Turning to slide eight. Fioptics revenue grew an impressive 22% during the year, demonstrating how we continue to win where we have fiber. During 2017, we added both video and Internet subscribers despite continued intense marketing and advertising efforts from our primary competitor. In the fourth quarter, we added 5,400 Fioptics Internet subscribers and ended the year with approximately 227,000 total subscribers with penetration rates reaching 40% and ARPU increasing 3% year-over-year. Fioptics Video Internet net-adds totaled 3,000 in the fourth quarter, ending 2017 with approximately 147,000 total subscribers. Penetration rates and video churn remained largely consistent with the year and ARPU increased to $88. Turning to slide nine, I’d like to review performance in our consumer business in carrier markets for the entertainment and communications business. In the fourth quarter, consumer market revenue increased 6% year-over-year, while performance in our business market remained relatively flat. We expect both these trends to continue as customer transition from legacy copper product offerings to fiber based solutions. In our carrier market, we experienced 5% year-over-year decline in the fourth quarter due to challenges related to ongoing pricing pressures and carriers’ increased focus on improving network efficiencies. We expect the previously announced wireless backhaul contract to increase our macro tower market share to more than 90% around Greater Cincinnati and partially mitigate carrier revenue decline once fully operational in 2019. Despite persistent challenges in the carrier market, the promise of 5G should create additional backhaul opportunities in the future, and is another source of support for our continued investment in fiber densification. Moving to slide 10, I’m very pleased with the progress with the pending merger with Hawaiian Telecom. We’ve completed several critical milestones in the approval process. In November, Hawaiian Telecom shareholders voted in favor of the transaction and the merger clears the Hart-Scott-Rodino Antitrust improvement Act review period. Most recently in December, we received approval from the Hawaiian Department of Commerce and the consumer affairs cable television division. Regulatory processes are well underway and the SEC and the PSC in the State of Hawaii. We continue to believe that we will be able to close this transaction in the second half of this year. Now turning to IT services and hardware segment on slide 11, which includes financial contributions from OnX during the fourth quarter. The IT services and hardware statement generated $230 million and adjusted EBITDA of $12 million for the fourth quarter of 2017. For the full year, revenue totaled $512 million and adjusted EBITDA totaled $33 million. In 2017, ongoing declines in lower margins hardware sales and services driven by major cost cutting initiatives by one of our larger customers negatively affected results for the year. While we expect to face some continued headwinds in 2018 with this customer, we remain optimistic that new opportunities will materialize through the increased geographic footprint and diversification of our customer base that comes with the acquisition of OnX. As we turn to slide 12, I’d like to provide an update on OnX and its integration status. Since completing the acquisition early in the fourth quarter, management teams on both OnX and CBTS have been working tirelessly to ensure a smooth and successful transition. We have made great strides from an organizational and salesforce perspective and we are very excited to officially welcome OnX employees to our team. While a large portion of OnX sales have historically come from reselling IT equipment, our teams are now working to be able to leverage CBTS’ extensive portfolio of services to tap into increased demand for IT services across this new North American platform. With that, let me turn the call over Andy who will walk you through cash flow performance for 2017 and the financial outlook for 2018.

[Andy Kaiser:]

Thanks, Leigh. Moving onto our cash flow performance on slide 13. We are very pleased to report that we generated positive free cash flow of $28 million in 2017, including $13 million contribution from OnX. Year-over-year free cash flow increased by $141 million due largely to reducing capital expenditures by $76 million and improved working capital. We ended the year with net debt of $1.4 billion, resulting in a current net leverage of 4.1 times. As previously mentioned, we expect leverage to be slightly under 4 times after the closing the merger with the Hawaiian Telecom and once expected synergies from both mergers have been achieved. As presented on slide 14, capital expenditures were $210 million for the full year of 2017, reaching the high end of our guidance as we were able to take advantage of purchase and volume discounts near the year end, which should generate approximately $24 million of cash savings over the next several years. Capital expenditures for our Fioptics suite of products totaled $125 million and we invested $44 million in other success based business fiber build and new IT services projects, and an additional $41 million in maintenance. During 2017, we’ve passed approximately 39,000 new addresses with Fioptics, surpassing our original target by almost 4,000 homes and businesses. Turning to slide 15. With the new revenue accounting standards becoming effective in 2018, we will begin recognizing telecom and IT hardware sales net of products cost. Therefore, we expect 2018 revenue to be between $1.2 billion and $1.275 billion. For reference, have the revenue standard not been effective, our revenue guidance would have been $1.7 billion to $1.775 billion. It is important to note that we will be restating each of the respective prior periods for comparability. In addition, I would also highlight that this change has no impact on operating income or adjusted EBITDA, and will have a positive impact on operating margins. Now, let me walk you through the rest of our financial targets for the full year of 2018. We are forecasting adjusted EBITDA to be between $320 million and $330 million. We also expect to generate positive free cash flow during 2018 with capital expenditures between $190 million and $210 million, as we continue to invest where we see opportunities to gain or maintain market share. Interest payments are expected to be between $115 million and $125 million. Contributions to our pension and post retirement plans are expected to be $15 million to be $20 million during 2018. Please note that this guidance does not include any contribution from the pending merger with Hawaiian Telecom. With that, I’ll now turn the call back to Leigh for some closing remarks.

[Leigh Fox:]

Thanks, Andy. As we kick off 2018, we remain encourage by the underlying momentum in our business. Our 2017 performance demonstrates our ability to manage through adversity while capitalizing on growth and demand for Fioptics and our strategic IT solutions. We have also realized the need for further simplification and transparency around our two businesses, and are excited about the reporting changes coming in 2018. Importantly, we will be making changes to our segment reporting to align with our boarder strategy of building two distinct complementary lines of business. Beginning in the first quarter, we will be transferring commercial CLAC operations out of the entertainment and communication segment and into IT services segment, with the intent consolidating all companywide voice over IP sales and highlighting the strength of this large and growing UCAAS business. And our IT services and hardware segment, we will also report financials by product practices, which will help better define the differences between types of non-recurring and strategic recurring services. We believe this structure better aligns with how we manage operations and improve the investors’ ability to appropriately value these services independently. Within our entertainment and communications segment, we will begin reporting metrics with more transparency around fiber to the premise, fiber to the node and legacy copper plan. We believe that this will provide investors greater visibility in how we continue to separate ourselves from traditional ILEC peers and solidify how we are more than capable of competing with cable, not just today but well into the future. Operationally, the focus in 2018 has not changed. We will pursue growth in our two distinct businesses with the focus on creating platforms with sustainable future cash flows, while maintaining a highly disciplined approach to managing both our balance sheet and capital allocation. In our entertainment and communications business, we remain intensely focused on closing the Hawaiian Telcom transaction. And we’ll continue to efficiently build fiber. Our results demonstrate that we continue to compete and win against cable with fiber, and additional investment is critical for us to continue to compete effectively. Specifically, where we have fiber to this customer prem, our penetration rates improve significantly and our churn is meaningfully lower. We will also continue to streamline our organization to reduce cost in our legacy business as appropriate. In the IT services business, we will continue the integration with OnX, while strengthening our recurring product base across our North American platforms. We are confident that our increased operational scale will allow us to win larger deals across diversified customer base, while continue to shift our product mix for non-recurring product sales to recurring services. We are confident and road-ahead and we believe we are well positioned to deliver long-term value for our shareholders. I’ll now turn the call over to the operator and open up for Q&A.

[Operator:]

Thank you, sir. [Operator Instructions] And we’ll take our first question from Batya Levi with UBS.

[Batya Levi:]

Can you provide a little bit more color on what guidance assumes for entertainment trends for ‘18. It looks like excluding the contribution from OnX, maybe you’re looking for some stable trends. And also maybe tie that into free cash flow, you did not reiterate. But do you still assume that you can be positive free cash flow for the year?

[Leigh Fox:]

The trends for E&C remain very solid stable as you can see from the operating metrics. So we’re very encouraged by what we’re seeing. As mentioned in the script, we continue to see a very constant rate of marketing from our competitor, but we’re performing well. So we don’t see that changing in 2018 and Andy do you want to take the cash…

[Andy Kaiser:]

So regarding your free cash flow question, it’s going to be very similar to 2017. So obviously, we’re not giving a specific free cash flow guidance number. But our intention is to manage within the cash that we generate. So I would expect 2018 and I would even say 2019 and 2020 likely would be similar to what you saw in 2017 where we will manage effectively and within what we’re able to produce, while continuing to build as aggressively as we can from a Fioptics perspective.

[Batya Levi:]

Maybe just one follow-up on the competitive environment. Can you talk about maybe your ability to increase prices both on the data and video side this year?

[Leigh Fox:]

So we did implement price increases in January. Price increases are really a function of the market. I would say that it’s a fairly stable market. We’re both competitive on speeds but I think the way I view it is pricing is rational, but where we're giving and taking with each other is on speeds. And so we're -- that's why the platform is so important. You have to be able to compete with the product. And I think the pricing is very rational. But like I said, we did implement price increases on certain products in January this year as we do most years. And so we don't see that being an issue.

[Andy Kaiser:]

And one thing I'll add to that Batya is largely the price increases are correlated with the increase in content cost. So unfortunately doesn’t drive a lot of incremental margins, it's largely to remain ahead of the content cost increase that we see on an annual basis.

[Operator:]

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

[Unidentified Analyst:]

Thanks for taking the question. This is Angela on for Dave. Two questions if I could, both regarding guidance. You expect EBITDA to fall within the 320-330 range for '18, but if your run rate this quarter, EBITDA will get to about 314 for the year. So you mentioned that 4Q also is a heavy booking quarter for the OnX business within hardware. So how do you expect to get to the guide if EBITDA steps down for the next few quarters? And then second is regarding margins for the entertainment segment. There is about a 150 bp contraction versus last quarter. Do you expect this trend to remain at this rate going forward, or do you expect margins to improve? Thanks.

[Leigh Fox:]

I'll take the first part and then I'll hand the second part over to Andy. So fourth quarter, I'm not sure that I would classify fourth quarter as a heavy booking quarter for OnX, I wouldn’t. Although that we’ve said that we have I am not sure where that came from. But it was a good quarter, it’s just not -- I don’t think that's from a secular basis. I don't think that's how the revenues come in. So we expect good trends out of that business. So I don’t that affects how you look at it. And then we have certain costs that flow naturally in our business into the fourth quarter that if you look at prior periods, that tend to compress margins a bit, which makes fourth quarter a little more challenging for us. But other than that, I don't see an issue with guidance at all. I mean, Andy do you want to elaborate on it.

[Andy Kaiser:]

And I'll add to that. And this really affects both, impacts both of your questions. And we did this last year, we did it again this year where we increased pretty significantly marketing spend for Q4 of 2017, really due to the ongoing competitive positioning that spectrum is taking. So that obviously has the impact of both reducing EBITDA for the quarter and also impacting the margin. So on a go forward basis, 320 to 330 absolutely feels in line.

[Leigh Fox:]

And that's the compression I mentioned earlier, typically around marketing for moving into the Christmas and holiday season.

[Unidentified Analyst:]

Just as a follow up for OnX. So if we run rate the $8 million EBITDA this quarter then we get to say $32 million for the year, it's about 10% growth from when you disclosed, when you announced some acquisitions. So is that the growth rate for that business…

[Leigh Fox:]

I wouldn't just -- it's a little more complex than taking one quarter and multiplying it like four. They are definitely a cyclical sales company. They are very reliant on aftermarket hardware sales. So it's really hard to take one quarter and multiply it by four. But what I would say is it's definitely in line with where we were guiding. I wouldn’t expect for this year any more than what we guided, especially with the fact as we're integrating two companies and we need to do the right thing and making sure that we spend a little money to integrate to save money. This is long-term strategy. So lot of times we definitely cut cost out of the gate and we've done exactly what we expected to internally. And so that’s working. But you’re also spending a little money to integrate. So I wouldn’t change how we stated the view in the past that nothing has changed since then.

[Operator:]

And we’ll take our next question from Sergey Dluzhevskiy of Gabelli & Company.

[Sergey Dluzhevskiy:]

So you gave us a brief update on OnX integration. Maybe if you could elaborate more on the primary focus areas that you see for the combined IT services business in 2018 and over a medium term. And as you look at this business and as you potentially look for additional acquisitions in that space, what would be the primary focus areas given the assets that you already have?

[Leigh Fox:]

So far it’s going exactly as expected. From a cost savings standpoint, we've taken out -- we committed to a two year cost savings. We actually achieved almost half of that out of the gate. And then what we're doing is investing on integration this year to three lines of two companies the other. What we expect is and I think this is a generalized trend throughout the industry is a shift from value added resale of hardware, so point of sales hardware sales to more recurring services. What we see from customers is that they want more solutions they want a provider like us to solve problems for them given the product they switch. We will continue to include hardware but we’ll include a lot more than just hardware. We see great trends in our UCAAS business, so cloud based voice, we see a very large funnel there, cloud-based migration, professional services. So we're seeing a combination of everything up the stack, and IT being sold to customers. I think as Andy mentioned, I think it’s important to highlight one of the changes we made this year around recognition of hardware. I think it’s an important move for us because I think the industry is trending to a services oriented industry. And we truly are a value added reseller of hardware and that bar. And in that we are just reselling OEM equipment to an end customer. And by doing what we're doing, we are taking out a lot of the volatility in hardware sales, increasing margins and then also concentrating on what's core to the business, which are the recurring services such as our UCAAS or unified communications, the professional services, some of the managed services -- managed infrastructure services that we offer. So that will be the trend. What we see is that all coming together through both the companies in the future. What I see beyond that from an acquisition standpoint right now, we’re really focused on the integration with OnX and Suntel, and making sure that we’ve integrated those companies properly that we see the result that we expected out of those companies. If you see anything from us in the future and I’d be surprised if it was this year. But if you see anything from us in the future, it would probably bolstering various products. So as an example, bolstering the UCAAS business or bolstering something in our cloud migration business, just an way to enhance product. So I think we’ve got enough scope in the business now to really move forward. And so I’d probably be looking if at anything for product enhancements. Does that help?

[Sergey Dluzhevskiy:]

Yes, thank you. Another question around 5G, so Verizon obviously is going to the commercial launches of its fixed wireless 5G solution, AT&T is thinking about mobile 5G. Cincinnati is exactly the sizable urban market where all those competitors could potentially lay. So Leigh if you could talk a little bit about 5G how you view it, to what degree it is a risk and to what degree it is an opportunity for you given your wholesale business?

[Leigh Fox:]

That’s a great question, something we talk about constantly. We view it is more of an opportunity than a risk. I think for our core products, it’s going to be very hard to -- in the near-term at least the foreseeable future as far as I can see, offset our core products, such as fiber based bandwidth. I think with anything any technology like 5G, you need a very, very strong redundant terrestrial network, and that’s what we have. We have that both here and we will have that in Hawaii also. And I think that makes it very much an opportunity for us in the mid-term and the long-term. As these carriers move into markets, really the decision is do we build our own fiber infrastructure or do we buy it from a provider in place. Obviously, when it come in our markets, they’re going to see very strong secure redundant fiber networks. And so the cost to build is going to be very high for them versus using us. So we see a lot of opportunity on the carrier side and the wholesale side.

[Sergey Dluzhevskiy:]

And my last question is about capital allocation. If you could discuss your capital allocation priorities over medium-term and where return on capital to shareholders and stock buyback fit on that list?

[Leigh Fox:]

So from a capital allocation standpoint, I think we’ve been pretty straight forward on -- we believe at reinvesting in the business for quarter and reinvesting into the network is an even short-term -- and we really see that because of the results. If you think about the industry, I’m a huge believer that our industry is in an investment cycle. And if you’re not investing, you’re going to hurt long-term. And so I think we as a company have done a right thing in investing and we continue to do the right thing. And we really see it through the metrics and the customer metrics and what we’re winning and the products that we’re offering. I think when it comes to share buybacks we are limited by our bank structure, capital structure and how much we could buyback. Unfortunately, I don’t think it’d be meaningful. I look at meaningful buybacks and the $100 million plus range and so really move a needle and we don’t have that capacity. But look, we’re always looking at opportunities. I mean obviously, I look at the stock price and as it’s been migrating since the beginning of the year. And to me, I’m a buyer of that, right. So we’ve had a lot of discussions internally. I’d like doing the math on what that looks like and how much we could do or what would be meaning or if that’s even possible. But it’s a balance between making sure that you focus on the long term and the short term. But again, at these prices, I'm a buyer. So it looks attractive to me. So we'll see but we are confined by how much we can do. Andy do you want to add anything to that.

[Andy Kaiser:]

No, I would just say Sergey. Obviously, to Leigh's point, given where we're trading and where we think we should be trading, there's certainly an opportunity for us to do some repurchase. But it just -- again it's always competing with the other use of those funds. And right now to Leigh's point, growing aggressively our fiber footprint, we believe from a long term perspective, is most important. And also to Leigh's point, it likely wouldn't be a substantial repurchase but we are actively looking at what we could do and the timing of that.

[Leigh Fox:]

We're always looking at that balance, Sergey. And I said I said early on that the three things we look at are you pay down debt, you reinvest in yourself or do you give money back to shareholders, and what's the best return. And we're constantly looking at the math around all those and the consequences in the short, mid and long term.

[Operator:]

And we'll go next to Davis Haybert with Wells Fargo.

[Davis Haybert:]

I wonder if you could talk about the broadband environment. You touched on the competition, but maybe if you could be a little more specific. What broadband speeds are you leading with? Which broadband speeds are you having the most success with? And are you competitive across the entire Cincinnati footprint from that perspective?

[Leigh Fox:]

I'm going to hand that question over to Tom Simpson, Chief Operating Officer.

[Tom Simpson:]

So if you look at the fiber to the prem area where we lead with 400 meg, we're very competitive in that area. We use the speed as a currency to help drive up penetration. In the fiber to node area, which is really the remainder of 25% of the strategic market, speed is where we're pushing and the new norm is 50 meg offer and in some of those areas that is adequate. But as Leigh and Andy have spoke, that's why we continue to look at continued investment in fiber builds. I'll tell you that the fiber area is, from a competition standpoint, we hold our own with the competitive nature of that we have one major broadband provider in the area. And even as I look at the 5G builders, it’s a boon as Leigh had mentioned for us, it’s a very-very small potential of our current market and it's going to us continuing to build fiber will help drive up penetration for us in the 5G.

[Leigh Fox:]

I would add to that a key metric that indicates how we're doing in the market, 2017 we added 29,000 Fioptics Internet subs. And obviously, those are coming from our own base, as well as our customer. So we are adding on a net basis, significantly on a year-over-year from a year-over-year trend perspective. And from an Internet specific perspective, we're at 40% penetration level and growing. So we continue to compete very effectively against Spectrum in market.

[Tom Simpson:]

And one final thing to add in the fiber to the prim market area where 400 meg is the going rate, we also obviously offer 500 and 600 gig and we're trialing 5 gig and 10 gig offers for businesses.

[Davis Haybert:]

And what is spectrum leading with, is it pretty consistent across the footprint?

[Tom Simpson:]

It's pretty consistent, they are meeting us at 400 meg and areas. There is some areas where they can offer and there is some variances, but it is a lead offer 400 meg.

[Davis Haybert:]

And then what is the outlook for housing growth in Cincinnati given you’re somewhat exposed to that single market?

[Leigh Fox:]

So the housing market in Cincinnati continues to improve. We’ve really, across all of Cincinnati, been undergoing a renaissance that’s been picked up by major periodicals as the model for how to revitalize a city. Greater Cincinnati economy, I think right now is the fastest growing in the mid west so very stable environment. Obviously, with folks moving in and out some times that can impact churn related to move related turn. But what we’re seeing is very positive macroeconomic trend across it.

[Davis Haybert:]

And there were some headlines in the trade around the Cincinnati building a municipal fiber network. I think it was maybe only the CBD. But maybe if you could talk about how that impacts you if at all?

[Leigh Fox:]

It doesn’t impact us at all.

[Davis Haybert:]

And then last question, any thoughts around the outlook for Hawaiian Telecom in 2018, is that something you could touch on?

[Leigh Fox:]

That’s not something we could touch on right now.

[Operator:]

And we will go next to Arun Seshadri with Credit Suisse.

[Arun Seshadri:]

Just a couple from me, mostly focused on the IT side. Just wanted to understand in the quarter, is there any way to look at CBTS, excluding that large customer. What the recurring base is and how that’s growing? And then separately, you also talked about OnX. What was the, I guess the pro form year-over-year growth there?

[Leigh Fox:]

The recurring trends, I mean it's one of the reasons why we’re doing it, making the changes in financial performance. So I would say that right now the combined company is probably 70-30 split between hardware, 70% hardware and 30% services, but the services are growing outside of that large customer and continue to grow. On UCAAS side, we’ve got very large funnels and the positive aspect of that is very large funnels, not just around Cincinnati but across the mid west and beyond, but mainly East Coast right now. So we're seeing a lot of success with our UCAAS business. I would say hardware trends themselves continue to -- hardware continues to decline and that has I think everything to do with probably the macro factors as companies look at when they upgrade their infrastructure, whether they buy the equipments upgrade or infrastructure or they outsource it to providers like us or others. So it’s important to have the mix of products that we have going into the future. I would say for pro forma growth, flat to slightly up. Bnd mainly because of the impact of the one major customer, when you have a customer that large and they go through issues it has an effect on your performance. So I think we’ve done a great job as a team to recover from that and maintain a good relationship with that customer and move forward. But those shifts are hard and so that team has done a really good job throughout that.

[Andy Kaiser:]

And I’ll add to that, Leigh touched on this. But we absolutely anticipate and this is really the fundamental premise behind OnX. Overtime, margins should improve as we move more and more customers toward cloud based services offering UCAAS. And obviously, with that comes a much higher margin profile customer than the infrastructure based customer.

[Arun Seshadri:]

Just wanted to understand, so that flattish pro forma combined trajectory is that -- and I guess the near term, will that be roughly down a little bit on the CBTS side and up a little bit on the OnX side on a pro forma basis and then that’s what’s creating the roughly flat overall trajectory?

[Leigh Fox:]

I mean, that’s probably fair to say. The hard part and if there is any hesitation, the hard part is when you integrate and you take cost related to both, it’s hard for me to combine where it comes from and separate the entities. Again, our intent is to truly combine the entities. And so we talk a lot about being able to report each entity apart from one another in the future, it’s going to be hard, because we’re truly integrating both together. But yes, I think that’s a fair way of looking at it.

[Arun Seshadri:]

Just a last couple of things to me, one on the IT side again, just overall looking at EBITDA for 2018 and the guidance. Is there any way you can break out of that roughly 325 at the mid. How much of it the IT versus core business?

[Andy Kaiser:]

So we are, to Leigh’s point, we are currently in the process of moving our CLAC operation into CBTS. So there is still a whole lot that is moving. So what I would prefer to do is at the next call, give a clear update as to what those numbers and trends ultimately look like. We’re still working through structural changes and I don’t want to give something preliminarily before we have that move completed.

[Leigh Fox:]

And we don’t give guidance -- we don’t give EBITDA guidance by segment. But what you will see with the new reporting, you’ll be able to see down the profit margins, you’ll be able to see segment performance and then with corporate performance. So you should be able to split it out more cleanly than I think we have in the past.

[Arun Seshadri:]

Last thing from me on the leverage side, roughly 4 times pro forma, you’re talking about potentially the stock being -- so maybe tantalizing at these levels. Just wanted to get your thoughts on where you think leverage should be? And if you’re comfortable around these levels or you’d rather be a little bit lower, just some broad thoughts around that. Thanks.

[Andy Kaiser:]

We’ve stated this in the past we’re definitely comfortable at around 4x. And we think that that is an appropriate level given the combined entities and the cash flow potential of the combined entity. Obviously, back to Leigh’s comment earlier, if there are opportunities for us to pay down debt and it make sense, we certainly would do that. But again, that always comes down to what is the most appropriate use of capital point in time. But we definitely feel comfortable at and around 4x.

[Leigh Fox:]

And from the stock comment, part of the reason we’re making the reporting changes. And so that the street and analysts can go in and say this company is X and profile wise and growth wise and it is comparable to these type of publicly traded entities, and this company is comparable to these. I think part of the thing that we suffered from is we're a confusing company with the IT services company and different parts being integrated together in both segments. What we're trying to do is to really separate these out and really highlight truly comparable companies. And then even within those companies allow the street and the analysts to go through and say, oh I see that business like Ucaas is a great example. I see that business, and that is comparable to these and wow look at the growth profile, look at what's happening there. And then conversely on the network side, the reason we mentioned we're going to break out more metrics by fiber to the prim, fiber to the node and you know legacy copper base. I think that's truly what drives value. And so we need the world to see and understand where we have fiber, this is a great business and we're competitively advantaged. And so we want people to be able to start to think through where profits come from in each segment, and so that's why we're doing what we're doing. And that's how we view the world, so it’s more of a sum of the parts view of the world.

[Operator:]

And we'll take our next question from Simon Flannery with Morgan Stanley.

[Unidentified Analyst:]

It’s Spencer for Simon, thanks for taking the question. So just a follow up on CapEx, your guidance implies I guess 5% year-over-year decline in '18, down 27% in '17. Can you quantify the impact the OnX CapEx? My understanding is that very low single digit capital intensity. And then given that we're seeing construction CapEx down 40% year-over-year, installation CapEx down 20% year-over-year. If not until ’18, do you see some point in the future now that you're approaching your 75% coverage in greater Cincinnati, where we'll see a significant spend down in total CapEx? Thanks.

[Andy Kaiser:]

So from an OnX perspective and you touched on this, as with our CBTS business, it is a very capital light model. One of the reasons we like the model as much as we do. I would say in '18, we'll expand a bit more on OnX just as we are integrating. And it’s not -- it won't be a big number, I'd say in the range of you 5 million-ish that we would spend with OnX. On a go forward basis, the capital needs driven by OnX are the same as CBTS, which is success based. So there's always a contract on the other side of that, and those are pretty easy decisions to make. To your second question around trajectory and what's it look like over the next several years. To clarify, we’re 70% covered but 50% of that is fiber to the home, 20% of that is fiber to the node. So as Leigh mentioned earlier, we compete very effectively where we’ve got fiber all the way up to the customer prim. So I would say over the next few years, which I know I've said in the past, I would anticipate capital spend in line with what you're seeing in '18 in our guidance, as well as what you saw in '17. We will be reassessing along the way by way of cost per pass and making the math work. But when we're seeing the penetration rates that we're seeing, when we’re seeing the net-adds that we’re seeing, when all the metrics are in together, we know that the continued fiber build make sense to ensure that we retain the customers that we haven't pick off customers from our competition. So I would anticipate the next several years, you would see CapEx at around where we're currently spending and then beyond that, we’ll be assessing at that point to determine if as far as we need to go or as far as we can mathematically. And at that point if that’s where we are, you would see a drop in ongoing CapEx.

[Unidentified Analyst:]

And just to clarify, so the $5 million OnX. Is that roughly the total amount of spend this year, or is that the extra amount you're going to spend in ’18? I think you said you’re going to accelerate some or spend more in ’18.

[Andy Kaiser:]

That would roughly -- again, these are rough numbers, but that’s identified as what we would spend on OnX in ‘18.

[Operator:]

And we’ll go next to Brian Hirschfeld with Bain Capital Credit.

[Brian Hirschfeld:]

Just wanted to get a little more detail on the subscriber dynamic, it looks like on net you're adding a few Internet subs. But I would love to understand, are most of the adds coming from your existing DSL footprint as people either trade up or you expand your territory. Or is more of them coming from the existing charter subs and you guys are essentially trading?

[Tom Simpson:]

The vast majority of the subs that we have from a net basis are coming from the competition. We're -- especially in the five areas we’re increasing our market share, and we have majority of the market share in the fiber areas. So to make a longer story short, yes we win from competition. Where we are building fiber in neighborhood that have legacy products but that is a modest call back. But again, we’re seeing high penetration mix from the competition.

[Brian Hirschfeld:]

So then would it be fair to assume that even as that legacy DSL business subsides, you still have the ability to drive incremental sub growth, either through bringing the penetration up to the 40%, 45% of the built out or adding additional built out fiber to the prim?

[Tom Simpson:]

Absolutely. As we build up fiber to the prim, we can drive penetration off of those networks.

[Operator:]

And with no questions remaining in the queue, I’d like to turn the call back to over Leigh Fox for closing comments.

[Leigh Fox:]

Thank you. Before we close, I wanted to reiterate that the 2017 was a transformational year for Cincinnati Bell and how excited we are as fast forward in '18 and beyond. I’d like to thank everyone for joining us today and for the continued support and have a great day. Thanks everyone.

[Operator:]

Thank you, sir. And again, that conclude our call for today. Thank you for participating. You may disconnect at this time.