Cincinnati Bell Inc.
Q1 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Ladies and gentlemen, please standby. We are about to begin. Good day welcome to the Cincinnati Bell First Quarter 2016 Earnings Release. Today's conference is being recorded. At this time I’d like to turn the conference over to Mr. Josh Duckworth. Please go ahead Sir.

[Joshua Duckworth:]

Thank you and good morning. I'd like to welcome everyone to Cincinnati Bell's first quarter earnings call. With me on the call today is our Chief Executive Officer, Ted Torbeck and our Chief Financial Officer Leigh Fox. This quarter we of condensed our prepared remarks in an effort to streamline our communications and allow more time for the question-and-answer session. Ted's comments today will recap our highlights for the quarter, provide a financial overview as well as an update on segment results. Following the prepared remarks Ted and Leigh will conduct the question-and-answer session. Before we proceed, let me remind you that our earnings release and financial statement are posted on our Investor Relations website. In addition, you will also find presentation slides for today's call which we hope you'll find helpful in your analysis. Today's call is being recorded if you like to listen to it at a future time. Now, I'd like to draw your attention to our Safe Harbor statement presented on slide three. 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 report and Form-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 website. With that, I am pleased to introduce Cincinnati Bell's Chief Executive Officer, Ted Torbeck.

[Theodore Torbeck:]

Thanks, Josh, and good morning, everyone. Thank you for joining us today. Our first quarter financial results and highlights are presented on slide six. Consolidated revenue for the quarter totaled $289 million, generating adjusted EBITDA of $77 million on strong demand for fiber-based products and IT solutions. Revenue from strategic products totaled $152 million for the quarter, which is up 21% compared to the prior year. As noted on slide seven, Entertainment and Communications revenue for the quarter totaled $190 million, which is up $2 million compared to the prior year, as we continue expanding our fiber network. Adjusted EBITDA totaled $72 million for the quarter, resulting in margins of 38%. Slide eight summarizes our first quarter Entertainment and Communication segment results by market. Revenue from our business markets was consistent with the prior year, while carrier market revenue was down due to no longer providing backhaul services to our discontinued wireless operations. Our strategy for these markets is to accelerate the transition from legacy base copper services to more strategic-based offerings. Consumer revenue for the quarter totaled $92 million, which is up 10% compared to the prior year on higher than anticipated demand for Fioptics. As illustrated on slide nine, we ended the quarter with 120,000 video subs, which is up more than 25% compared to the prior year. Video penetration rates have remained consistent even as we have aggressively expanded our Fioptics coverage. Churn for the fourth quarter was 2.4%, which is in line with expectations and improved from a year ago. Video ARPU totaled $83 which is up 9% compared to the first quarter of 2015. In response to consumers requesting more flexibility in their video selections, we launched our MyTV skinny bundle packages in March. First month sales of MyTV were higher than expected, but it is too early in our launch to provide meaningful take rates or the financial impact MyTV will have on future results. Total internet subscribers grew by more than 19,000 from a year ago, as we ended the quarter with over 290,000 subscribers. Fioptics Internet subscriber editions totaled nearly 11,000 for the quarter, which is a 15% increase compared to the first quarter of 2015. With Internet penetration rates exceeding 35%. Fioptics Internet ARPU totaled $47, up 12% compared to a year ago. Turning to slide ten, the IT services and hardware segment generated revenue of $103 million which was down 5% compared to the prior year which is due primarily to the cyclical nature of telecom and IT hardware sales. Strategic revenues totaled $48 million which was up 18% year-over-year. The increase in strategic revenue was largely due to increased cloud services revenue with our existing customers. Adjusted EBITDA for the quarter totaled $10 million resulting in adjusted EBITDA margins of 10% which is up from 7% in the prior year. We continue to see favorable result from our business customers and believe there are additional opportunities for us to win in this market as customer shift from hardware-based sales to cloud-based solutions. Now moving to slide 11, free cash flow for the quarter totaled $8 million, primarily due to improved working capital on increased collections in the quarter. We expect full year working capital changes to be in line with historical results. For the year interest payments are expected to total $75 million in dividends received from CyrusOne are anticipated to be $10 million at our current ownership level. Pension and post-retirement payments are expected to total approximately $12 million. Capital expenditures were $62 million in the quarter including investments of $37 million for Fioptics, $17 million for success-based fiber built for business and managed service products and $8 million for maintenance. Specific to Fioptics, we invested $17 million to pass an additional 22,000 new addresses, even those 57% coverage of Greater Cincinnati. Our first quarter financial and operational results were outstanding and consistent with recent trends. In conjunction with another quarter successful execution I am pleased to announce the Board of Directors has approved our request to approach our shareholders on vote to approve a 145 reverse stock split. As we have stated in the past, we remain focused on reducing our debt to the modernization of our investments in CyrusOne and evaluating opportunities to strengthen our equity. Along with our continued strategic execution, this reverse stock split is the next step in that process. By completing this reverse split, the increase in share value will likely increase liquidity by creating interest in our stock from a new class of shareholders. As we look forward, we believe that through our proven business execution further reductions in debt and the eventual buyback of shares we have several pass available for driving continued shareholder return. This reverse split creates a more stable foundation as we continue our work. In closing, I would like to reiterate how pleased I am with this quarter's performance. Consumer demand is exceeding our expectations and we're driving business growth through product migrations. With the successes, we continue to transform Cincinnati Bell into a technology Company with state-of-the-art fiber assets. This concludes the prepared remarks for today's call. Thanks for listening. We will now open the conference up to questions.

[Operator:]

[Operator Instructions] And we go first to Simon Flannery with Morgan Stanley.

[Simon Flannery:]

Great. Thank you very much. Just following up on the reverse stock split, Ted, is there any timeline for when the board vote would be in and when that might happen? And then if we can come back to Fioptics, you gave some good penetration numbers. Perhaps you can just give us a little bit of some of vintages because a lot of your Fioptics neighborhoods are pretty young, so what does a more mature Fioptics? What's sort of penetration numbers do we see there? And what's your current thinking about when you sort of reach the limits of the Fioptics build and sort of you start to wind that down? Thanks.

[Theodore Torbeck:]

Well, thanks for the question, Simon. The Board of Directors has approved our request to approach shareholders for a 125 reverse stock split. So we are working the paperwork to get that put in place. So the board has approved it. On a Fioptics penetration, usually first pass were just South of 20% penetration and as we mature in the neighborhood we're getting up in the 30%. Our most mature market where close to 40%.

[Simon Flannery:]

On Internet or TV or both?

[Theodore Torbeck:]

Both. On both.

[Simon Flannery:]

Okay. And the balance of the Fioptics build?

[Leigh Fox:]

On that timing wise, Simon, this is Leigh. Timing wise we expect as we've mentioned to begin to wind down more than likely in the second half and when we say wind down you will see the slowing of neighborhood builds. And that should happen I would say in the third quarter of '17 is where we have it projected.

[Simon Flannery:]

And that said about 70% coverage?

[Leigh Fox:]

Yeah. It should be in the high 60s or 70.

[Theodore Torbeck:]

Again it is success based and as we see the returns not generating what we expect, will shut it down or slow down significantly.

[Simon Flannery:]

Okay. Thank you.

[Operator:]

We'll take our next question from Sergey Dluzhevskiy with Gabelli & Co.

[Sergey Dluzhevskiy:]

Good morning, guys. Congratulations on the quarter.

[Theodore Torbeck:]

Thanks Sergey.

[Sergey Dluzhevskiy:]

A couple of questions if I could. So, on MyTV bundles I understand that it's still early in the process but may be you guys could share what you're learning from customer behavior given the results from the last few months and have you seen - are there anything surprised you as you approach customers with those bundles?

[Theodore Torbeck:]

I would say on MyTV, the numbers probably tripled our forecast as we work through about a month and a halfish of results. So we are not in a position to really comment on financial impact yet, but I will say that it was volume wise about triple what we expected, so very, very positive results.

[Sergey Dluzhevskiy:]

One question on M&A. So you have been looking to scale up your IT services business, came close to buying a company but then decided not to do it. And so if you could share your thoughts on IT services space as you see it now and potential acquisition opportunities there and also more holistically how should we think about your M&A, overall M&A philosophy at this point?

[Theodore Torbeck:]

Well, we still remain extremely bullish on our services business. There are opportunities. There's a lot of consolidation going on in the industry. We are really focused outside of Cincinnati as well. So we now have a presence in Indianapolis, Columbus and Louisville in particular. Again, we've got a good pipeline of opportunities and will continually look at it. And M&A is something that --- we have a good plan for organic growth, and M&A as we see is way we don't see a large acquisition, but we see as we see opportunities to expand. We will continue to review opportunities and make sure that they make sense.

[Leigh Fox:]

Yeah, I would just add to that from a philosophy standpoint. I probably characterize it as cautious philosophy. We feel like we've done a really good job executing as Ted mentioned on the organic strategy and as he mentioned, there's a lot of opportunity. We feel a part of our job as we have to look at these opportunities, but were cautious about it.

[Sergey Dluzhevskiy:]

Okay. And last question, obviously you just announced that your stock split is one of the ways to potentially enhance shareholder value. You mentioned buybacks. I might have missed part of your prepared remarks. How should we think about various ways that you're thinking about to enhance shareholder value over the next few years?

[Theodore Torbeck:]

Other than the reverse stock split?

[Sergey Dluzhevskiy:]

Right, and buybacks.

[Theodore Torbeck:]

So the way we think about returning value to shareholders, the reverse stock split is really in my mind, kind of a correcting factor from history. Again, if you look at the history of the Company, we've gone through various levels of transition and transaction and you saw a big increase in our shares, the volume during the broad wing phase and era of the company. To me this is just getting us back to the future essentially. We have too many shares outstanding for the Company that we are today. So this is a good move at a good time because you’re seen quality earnings. You're seeing really good operating trends from us, so we just feel like now is the time to reset the base. But from a returning value to shareholder, execution and growth. So growth in our EBITDA, share buybacks and returning cash to shareholders once cash is available and honestly as they continue look at reduction in debt. I think we've created a company that can start to deliver on multiple fronts and those would be the fronts that we look at. Is that helpful?

[Sergey Dluzhevskiy:]

Yes. Thank you.

[Operator:]

We go next to Frank Louthan with Raymond James.

[Frank Louthan:]

Great. Thank you. On the Fioptics can you talk to us a little bit about what percentage of the homes there are MDUs in the base and what sort of percentage of homes that are MDUs that you're targeting going forward or is it mostly single-family that you building to?

[Theodore Torbeck:]

About 30% are MDUs today and today we are not building any to MDUs.

[Frank Louthan:]

Alright. And then quick follow-up, give us your thoughts on the special access provision with the FCC. Now, are you in that area of special access in that receiver how does that --- how do you fall with that and how does it look to affect your business?

[Leigh Fox:]

Hey, Frank it's Leigh. I think like everyone we are waiting to see what the impact is. I think probably in a better position than most. We already have limits within special access. We have roughly $13 million in special access revenue. But we are waiting to see what the outcome or following it closely. We think our exposure is minimal for who we are today. But again there are different caveats. So we're within that proposal that we’re just waiting to see where the FCC lands.

[Frank Louthan:]

Alright. Fair enough. Thank you.

[Operator:]

We’ll take our next question from David Barton with Bank of America.

[David Barton:]

Hey, guys thanks. First one is just following up on that question, Leigh, could you talk about whatever expense would be a potential offset to the revenue number would be helpful. Second, would be could you just elaborate a little bit on the E&C EBITDA margin this quarter. It was definitely head of what we were expecting and kind of some of the drivers and sustainability of that. And then lastly, I think that obviously the math of a reverse stock split doesn't create value. I think what your intention is to get the stock above $5 and that potentially creates more appetite for the name. What are your bankers telling you that that potential pool could mean to the actual value creation that you're talking about from an equity perspective? Thanks.

[Leigh Fox:]

So I'll address your first on the follow-up of special access. Very little expense impact; we are a net receiver on that end. Do you want to take the second question?

[Theodore Torbeck:]

Yeah, we feel very good about the margins this quarter and its driven by continue to increase price as well as cost control. So it's both ends, so very positive and very strong in the quarter.

[Leigh Fox:]

Then on your last question, David, I think you're spot on, on our strategy here. We feel that the stock is a little bit penalized for being under $5. It's very hard to quantify so as we looked at bankers we looked at lot of data. We worked with several folks. It's very hard to quantify the impact. There is a lot more qualitative evidence. The quantitative evidence does show that volumes and liquidity does increase quite a bit post the transaction and getting the stock over a certain dollar value. So we were shooting to be honest in the over $18 or around $18 range which is where the calculation came from.

[David Barton:]

Got. Okay, thanks you for the color guys.

[Operator:]

Our next question comes from Batya Levi with UBS.

[Unidentified Analyst:]

Hi, this is Chris for Batya. It looks like Fioptics monthly ARPU growth accelerated in 1Q despite the MyTV launch in March, I am not sure how much of an impact it had but any additional color you can provide there would be helpful including what sort of ARPU differential you see the MyTV offering?

[Theodore Torbeck:]

Well again, our prices or ARPU was up that’s but we don't see - I mean, in March we just launched it so there's a minimal impact in the first quarter.

[Leigh Fox:]

Yeah. The first quarter was impacted by price increases and as we move through the month, it will have a downward pressure on ARPU. But given its waiting on the total base, it's not going to be substantial in any way.

[Unidentified Analyst:]

Got it. And you've talked about the fiber build slowing into next year and I think you've previously said that you expected free cash flow will return to growth, can you just update us on your thoughts there?

[Theodore Torbeck:]

We still believe we will be cash flow positive.

[Unidentified Analyst:]

Okay. Great, thank you.

[Theodore Torbeck:]

Thanks.

[Operator:]

And with no more questions in queue this will conclude today's conference. We thank you for your participation, and you may now disconnect.