Cincinnati Bell Inc.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Good day and welcome to the Cincinnati Bell’s Q3 Earnings Conference Call. Today’s call is being recorded. And now I’ll turn the call over to your host, Josh Duckworth. Please go ahead.

[Josh Duckworth:]

Thank you and good morning. I’d like to welcome everyone to Cincinnati Bell’s third quarter earnings call. With me on the call today is our Chief Executive Officer, Ted Torbeck; and our Chief Financial Officer, Leigh Fox. Ted’s comments will focus on our strategic initiatives and Leigh will review our quarterly financial results. Following Leigh discussion and we will conduct the question-and-answer session. Before we proceed, let me remind you that our earnings release and financial statements are posted on our Investor Relations Web site. In addition, you will also find presentation slides for today's call, which we hope you will find helpful in your analysis. Today's call is being 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 Statements presented on Slide 3. In our remarks this morning, we will be discussing forward-looking information. Due to various risks and uncertainties, actual results or outcomes may differ materially from those indicated or suggested by any such forward-looking statements. More information on potential risks and uncertainties is available in the Company's recent filing 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 Web site. With that, I am pleased to introduce Cincinnati Bell's Chief Executive Officer, Ted Torbeck.

[Ted Torbeck:]

Thanks, Josh. Good morning, everyone and thank you for joining us this morning. My comments today will focus on our progress towards transforming Cincinnati Bell into a growing entertainment communications in the IT Solutions Company. Heading into 2014, we identified three key objectives critical to our success. As noted on Slide 6, we communicated that we would continue to investment in our growing fiber based businesses and strategic products. Second, we evaluated opportunities to monetize our CyrusOne investment and thirdly, we managed our wireless operations for profitability and cash flows as we consider strategic options for that business. Our first objective focused on operations and investing in the continued growth of our strategic products. We identified 2014 as an inflection point for wireline revenue growth and communicated the current year strategic investments would be funded through operating cash flows. We also recently announced that we’ll begin to increase the pace of our success base fiber investments. If you look at Slide 7, it demonstrates progress towards that goal and the significant impact these investments are having on the trajectory and the outlook for our company. Revenue from strategic products totaled $111 million in the quarter, up 19% from the prior year. Strategic managed and professional services revenue increased 15% from the prior year due to growth in services provided to our largest enterprise customers. Wireline strategic revenue increased $14 million primarily due to 39% year-over-year growth in Fioptics revenue. Fioptic’s revenue for the quarter totaled $37 million and is pace to exceed $140 million this year. Year-to-date, wireline revenue was up $10 million and we are well positioned to achieve full year revenue growth in 2014. Now turning to Slide 8, our next objective focuses on maximizing cash flows from our CyrusOne investment. Earlier this year, we sold 16 million CyrusOne partnerships units for cash, proceeds of $356 million. These proceeds were used to repay debt and the net of the two transactions is expected to increase cash flow by $15 million annually. Subsequent to the sale, we effectively owned 44% of CyrusOne currently valued at approximately $750 million. We also maintain a $750 million tax NOL which will be used to shelter any future gains. CyrusOne continues to produce outstanding results as evidenced by the 26% year-over-year increase in revenues and 16% growth in adjusted EBITDA. The team is also successfully expanding their presence in new markets. This quarter CyrusOne completed Phase II of their Phoenix facility and announced an agreement with a significant tenant in their Northern Virginia facility. We remain bullish on CyrusOne and the strategy for monetizing this investment has not changed. We’re committed to maximizing shareholder value by execute a well-timed and thoughtfully coordinated modernization plan that balances the upside of growth in CyrusOne with the goal of reducing leverage. Now moving to our next objective on Slide 9, this quarter we successfully closed the wireless spectrum sale with Verizon for cash proceeds totaling $194 million. The close of this transaction is created a unique opportunity to enhance our relationship with Verizon and increases our ability to capitalize on their significant wireless market share. The process of shutting down any business presents many challenges and will drive onetime cost. Much of the onetime costs related to our wireless shutdown have already been accounted for and we’re working diligently to minimize any additional cost. In closing, the completion of the wireless spectrum sale and combined with the initial monetization of CyrusOne were steps -- key steps in this management team strategy to transform Cincinnati Bell and have provided the opportunity for increased focus on our fiber investments. The growth related to our investments has significantly changed the financial outlook for Cincinnati Bell and the perception of our brand. We are confident that increasing the pace of our success based fiber build will further accelerate the process of creating a fiber based company with growing revenues, profits, significant cash flows and a healthy balance sheet. Now I’d like to turn the call over to Leigh to summarize our financial results for the quarter.

[Leigh Fox:]

Thanks Ted and good morning everyone. Our strong third quarter financial results highlight the continued demand for our strategic products and its team’s ability to execute on its objectives. As highlighted on Slide 11, consolidated revenue for the quarter totaled $328 million, up 5% from the prior year, as wireline revenue growth and strong hardware sales more than offset legacy in wireless decline. Adjusted EBITDA was $96 million and operating income for the quarter totaled $16 million. Excluding wireless, adjusted EBITDA was down $4 million primarily due to cost associated with accelerating fiber investments and other projects to streamline operations and shared services. Our segment results start on Slide 12, wireline revenue for the quarter totaled $184 million, up $3 million from year ago. Third quarter strategic revenue for business customers totals $42 million, up 10% on strong demand for Metro Ethernet voice products. Consumer strategic revenue was up $10 million, driven by 39% increase in Fioptics revenue. Adjusted EBITDA totaled $76 million, down from the prior year as we have started to accelerate our fiber investments and have incurred cost to streamline operations and shared services and to generate future cost savings and operating efficiencies. Margins were also impacted by the 8.9% loss in active funds resulting from the ongoing changes in the housing market in some wireless customers who also have disconnected their access line. Our key Fioptics metrics are highlights on Slide 13. Fioptics penetration rates in [channel] remain consistent year-over-year and the product is now available to more than 320,000 addresses or 40% of the Greater Cincinnati market. At the end of the quarter, we had 107,000 Fioptics Internet subscribers, up more than 40% compared to the prior year. Video subscribers totaled 88,000 at the end of the quarter, up 25% compared to the year ago. Fioptics’ ARPU byproduct was up on average 6% compared to a year ago as video ARPU totaled $76 and Internet ARPU totaled $39 during the quarter. Year-to-date wireline revenue is up $10 million compared to 2013 and we are on target to achieve year-over-year wireline revenue growth for the first time since 2007. The exceptional customer responses to our fiber products and the increased demand for our Internet speeds continue to be the driving force behind the wireline results. As evidence, our customers subscribing to at least 10 megabits of speed had increased 37% from the prior year and now account for more than 45% of our total Internet subscriber base. Turning to Slide 14, the IT services and hardware segment generated revenues totaling $120 million, up $32 million over the prior year on higher than anticipated hardware sales. Strategic managed and professional services increased 15% totaling $35 million for the quarter. Adjusted EBITDA totaled $12 million for the quarter resulting in record high margins. Although margins can fluctuate greatly from quarter-to-quarter due to the heavy volume of non-recurring hardware sales, we believe current margins will continue to slowly grow on an average annualized basis. Wireless results are presented on Slide 15. Wireless revenue declined 39% from the prior year and adjusted EBITDA was down $4 million as the rate of churns increased rapidly. As of the end of the quarter, we had 101,000 postpaid and 76,000 prepaid subscribers. With the holiday season approaching, we expect churn to further accelerate and our total subscriber base is expected to be less than 100,000 by the end of the year. As Ted mentioned, we are working to minimize cost associated with shutting down the wireless business. Year-to-date we’ve recognized approximately $15 million of onetime charges and expect to incur an additional $5 million to $10 million of restructuring charges as the process continues. We have also identified $25 million to $30 million of shared cost previously allocated to wireless segment that will be absorbed in the remaining core business. Slide 16 details our third quarter year-to-date cash flow results. As we close out the year we remain on target to generating positive free cash flow, but we’ll actively monitor our forecast particularly as it relates to onetime charges associated with the winding down of our wireless operations. Negative free cash flow for the quarter was expected with interest payments totaling $33 million, capital expenditures of $46 million, and pension and OPEB payments of $11 million. Additional details on our capital expenditures are on Slide 17. Year-to-date we have invested $31 million on the construction of Fioptics passing 47,000 addresses remaining on pace to pass our target of 52,000 addresses for 2014. We have also invested $25 million for installation and value added services during the discboard activations and additional traffic expected from the acceleration of Fioptics. Capital expenditures for fiber build to business and managed services project totaled $27 million and bring measurable deals driven returns. As an update to our 2014 capital forecast, the cost related to consumer fiber deployments are running favorable to plan, this has allowed to us begin work associated with our fiber acceleration while keeping full year capital expenditures at a low end of the communicated $180 million to $190 million range. At our Investor Day presentation, we indicated that capital expenditures would increase in 2015 as we look to accelerate our fiber investment. We considered several alternatives to finance our expansion and at the time of the meeting, were pushing banks to an aggressive plan to fund the expansion through secure debt. That secure debt plan requires facility amendments for incremental capacity which are prohibitively expensive at this time. As such our current finance to leverage wireless spectrum proceeds to finance the acceleration. We have secured credit release on certain financial covenants required to execute any acceleration plan and are confident in our ability to manage cash -- our cash needs accordingly. Any further change in this plan will subject to changing to conditions as we’re always looking for more efficiently is to manage cash. On September 30, 2014, we closed the wireless spectrum sale and suspended guidance related to that segment. As noted on Slide 18, we are reaffirming our full year adjusted EBITDA guidance of $333 million for the remaining core business and we’re increasing guidance -- revenue guidance to $1.1 billion due to strong enterprise hardware sale. Our success thus far in 2014 empathizes this team’s ability to execute on its strategic objectives. Each quarter we continue to produce strong financial and operational results, as we progress towards our goal of transforming Cincinnati Bell into a fiber based entertainment communication form IT Solutions Company with growing revenues, growing profits and sustainable free cash flows. This concludes the prepared remarks for today’s call. Thanks for listening. We’ll now open the conference up for questions.

[Operator:]

(Operator Instructions) And our first question will come from Sergey Dluzhevskiy with Gabelli & Company.

[Sergey Dluzhevskiy:]

Thanks guys. Congratulations on a solid quarter. Couple of questions, one on the wireline side, obviously you have announced your accelerated fiber deployment plans. Have you seen any competitive response from cable? And I guess, what is your general assessment of competitive environment competition with cable at this point, as you’re trying to close that transaction?

[Ted Torbeck:]

As you know, we’re expecting the first quarter -- end of the year first quarter close of the Comcast deal. We’re seeing very strong response from a competitive standpoint for Time Warner, we’re seeing things that their increasing capital spend in certain areas as well as offering very competitive offers in the marketplace. But, we feel we have a superior product and as we compete against them, we continue to win. So, I think that’s a key point, but they are responding like we expected, they are a strong competitor, we expect the Comcast deal to grow at the end of the year or first quarter at the latest and we’ll be well prepared to compete head-on with them as well.

[Leigh Fox:]

And Sergey, this is Leigh, you're seeing -- I think what you're seeing more is those companies kind of gearing up for the holiday season, both DIRECTV and Time Warner have new deals and I think a lot of they have to do preparing into -- I mean getting into the end of the year, new holiday season. As Ted mentioned, they’ve always been competitive, we’re seeing that continue, we’re not seeing anything out of the ordinary or nothing we didn’t expect or nothing destructive in nature with respect to their reactions of what we’re doing.

[Sergey Dluzhevskiy:]

One question on the IT Services and Hardware segment. Obviously, the margin improved two percentage points year-over-year. I am assuming the margin improvement lies in management and professional services given, the fact that it is a higher margin area to begin with. I mean could you pinpoint any specific services that are being scaled, that are contributing to this margin improvement and maybe if you could give more color on margins in the segment going forward?

[Ted Torbeck:]

Well, if you look at managed services, we do have return hurdles for the investment we put in and we’re pretty stringent to making sure that we achieve those. So, we’re having a terrific year on managed services business on the IT hardware service, it's really a mix depending on the customer and what the margin is going to be. But we’re working hard to improve the margins, we always will continue to focus there and looking to taking cost out so that we can get higher margins that -- that’s really to make up with the third quarter. So, increase in managed services and the mix in the hardware are the two major reasons.

[Leigh Fox:]

Sergey, the actual – if we’re seeing anything by products, it’s a combination of managed voice that -- we have a few very large managed voice deals that are scaling and managed infrastructure like VDC, we’re seeing scaling and those type of products. And as the scale those bring heavy incremental margins with them. From a margin trend standpoint, I would expect -- from an annualized basis during the year because of the hardware business that sub is really lumpy. But if you annualize the margins you should see a flow increase in the overall EBITDA margin year-over-year. But it’d be hard to predict from quarter-to-quarter.

[Sergey Dluzhevskiy:]

And last question. I guess on returning cash to shareholders, obviously the primary objectives right now lie in investing in the fiber infrastructure and also paying down debt to the extent possible. But is there room for returning cash to shareholders and if not, at what point do you think returning cash to shareholders would become more realistic? And in general how do you think about your stock, do you still believe that it is undervalued?

[Ted Torbeck:]

As you described, we’re really focused on making this a fiber based company that’s growing revenues, profits and cash flows. And we got ways to go to get our balance sheet in good shape we’re working hard to get there. We’re currently levered approximately five times and as we continue to focus on reducing leverage at the appropriate time we’ll make the right call and we’re view all our options. Again with the utmost look at the shareholder and what’s best for him or her. Our preference basically would be around repurchase shares versus a dividend so that’s our preference, currently thinking.

[Leigh Fox:]

And just to add to that Sergey, we have very little room today based on our banking agreements. We’ve looked into because I’ve been obviously very public on the fact that I think our shares are undervalued. Now I probably don’t risk adjust our shares as much as the market does obviously because I am here embedded in this team and are very confident in our ability to execute. But that said, I think if you look at cash flows going forward it’s something that we’re going to be very much on top of from a timing standpoint. But I would say that, the best way to think about it is until we do something major with our credit structure and our capital structure we’re going to be somewhat limited.

[Operator:]

We’ll now take the question from Simon Flannery with Morgan Stanley.

[Simon Flannery:]

Thank you very much. Staying on the capital structure, Leigh, can you just expand a little bit more on the conversations with the bank and any -- basically should we assume that you are just going to see 181 million cash on hand, should we just assume that that's what you used to fund the capital spending program? And is there any change potentially to your investment trajectory because of the bank negotiations? Is there any other opportunity to restack the balance sheet here? And then Ted, Cowen had a good set of results this week, the stocks done well here recently. Are you getting into the zone where you might reconsider, or revisit selling down more of your stake? Thanks.

[Leigh Fox:]

Yes. And so I’ll start with the conversations with the banks. We went at the end of last quarter out with a pretty aggressive amendment plan to fund Fioptics with secured debt. And it’s just at the timing of what we did with some of the changes in the market just made it cost prohibitive. That was sort of Plan A. Plan B was to use wireless proceeds. We have put in place amendments with our revolver banks that allow us to fund whatever we need for the next several-several months. So we’re pretty confident that we can keep the pace going. So, I don’t see any changes in pace related to anything to do with the capital structure. What may happen and we’ve been very honest about this that our whole intent was to basically put the gas paddle to the floor from a fiber build standpoint. And as operators we’re still determining what that is. We gave you I think some pretty accurate ranges but if anything were to change it’s because we’re either -- we either get more efficient with our capital or we’ve realized that we can’t be as efficient with the capital so we decide to change operationally. But I don’t see any capital structure drivers. From a restacking to capital structure standpoint, we’re really looking at timing wise of next year where it becomes I think a lot more plausible if you look at the senior notes that become callable in October. And you can start looking at probably one or two months before that as timing for reasonable refinancing from an NPD standpoint where it starts to make sense. So we’re looking very hard at it. But from a timing standpoint, I wouldn’t expect anything till then.

[Ted Torbeck:]

Simon, as far as Cowen is concerned, our goal is to maximize shareholder value. And we see Cowen as -- we remain very bullish on that company. They continue to perform exceptionally well, they had a great third quarter and we expect the same kind of results in the future. So, the good news is we don’t need to do anything, we’ve got operational and capital structure that we can be a patient investor and again our plan is to execute a well-planned thought out monetization plan.

[Leigh Fox:]

And Simon -- and I hope you saw this with the first monetization, but this question obviously comes out quite a bit, the bottom-line is we’re not forced into doing anything and our goal is for the market not to ever know what we’re going to do until we do it and we’ve been very clear on that from the beginning. We believe that us giving any kind of signal destroys value and so we don’t want to give any type of signal. So going forward, the best way to think about Cowen for now is, we have NOLs on the balance sheet, we have Cowen on the balance sheet, we will do what’s appropriate at the appropriate time and we will not signal a thing or try not to signal a thing for the very least minute when we make decision.

[Operator:]

Now we’ll take a question from Batya Levi with UBS.

[Batya Levi:]

Great, thanks. Couple of questions. First on churn, it looks like it increased both sequentially and on an annual basis. Can you talk a little bit more about the drivers of that maybe coming from what's coming from voluntary, involuntary churn? And maybe an update on what you are seeing in terms of churn in the Fioptics business? The second question is that as Windstream is going through the process of turning its network into a REIT, have you considered that also, is there any update on that? Thank you.

[Leigh Fox:]

Okay form a REIT perspective, absolutely for Windstream is that absolute made sense for them, it’s very creative way of refinancing to get -- they had a very high dividend, they were able to drive it down, we’re not in that position. We do think it's an interesting concept that we’ll continue to track and monitor and to see how it flows. But today we’re not a tax payer and we don’t pay a dividend, so those two things made the current time prohibit us to move forward on. With that said, we’re going to continue to monitor and if it make sense at some point, we’ll look at the options that we have.

[Ted Torbeck:]

And Batya on the churn, obviously churn is fairly complex piece that we stay on top of on a daily basis, you had a few things going on in the quarter. One, you had -- third quarter is typically a very heavy move season. So if you look at the split between MDU and SFU you had exceptionally high MDU churn in the quarter. We also had churn related to our wireless spinout. As we closed that deal and started to let customers out of contract and saw much higher churn on the wireless side, there was an absolute correlation between that churn and churn in some of our core products, so the way I think about this is we’re going to see kind of a natural somewhat I won’t say spike, but an acceleration as we get to the wireless deal and then we’ll see that dying down. And then from a go forward standpoint it should normalize quite a bit, but I would say if anything this months -- this quarter’s churn is related to those two items, it's the wireless divestiture and move season.

[Batya Levi:]

Are you seeing the wireless divestiture pressuring Fioptics churn as well?

[Ted Torbeck:]

No, so the correlation is mainly on legacy products on the Fioptic side that has lot to do more to do with the move season and the mix between SFU and MDU, if you remember third quarter last year was inflated also from a move season standpoint. So, I would say that it's much heavily -- much more heavily weighted on move. We’ve honestly when we did the correlations we saw no correlation to wireless, it was much more correlated to the act of the increase in the act of line churn.

[Operator:]

And now we’ll take a question from Barry McCarver with Stephens Incorporated.

[Barry McCarver:]

Good morning, guys. Good quarter. Thanks for taking my question. I think the first question earlier was asked about the cable competition, I think that was primarily directed to residential services. But I am curious, are you seeing additional competition on the enterprise and business services side?

[Ted Torbeck:]

That’s a good question Barry, I mean the good news in this market we have excellent relationships with the enterprise customers and that plays such a big part in IT business and -- so we always see competition, but we’ve been very successful in marinating and growing our business with enterprise customers and we continue to do so. Where we do see pretty stiff competition is in with Time Warner’s on the lower end some of the smaller companies where we don’t have fiber already build out, they offer very competitive offers that the fact that we don’t -- can’t provide the speeds it puts us at disadvantage. It’s really another reason why we’re building out faster on fiber.

[Barry McCarver:]

Okay, that's helpful. And then in regards to the holiday season and Fioptics, what are your plans to offer competitive packages kind of mixing, you're getting in the mix with what the competitors are doing here?

[Ted Torbeck:]

Well, we remain -- we’re very competitive price wise to Time Warner and we’ll continue to do so. I think the holiday season actually the business, it’s a little slower people don’t generally change out during the holidays. But we have very competitive offers to Time Warner and we’ll continue to do that.

[Barry McCarver:]

Okay, thanks a lot guys.

[Operator:]

And next we’ll hear from David Barden with Bank of America Merrill Lynch.

[David Barden:]

Hey, guys. Thanks for taking my questions. I guess a couple if I could. So just first on the hardware sales side, obviously it has been a huge increase year-over-year, 25% year to date, like $70 million. Could you kind of elaborate a little bit on the strategy that’s underpinning this big move in the enterprise – sorry the hardware sales side? Because I guess on one hand we hear from companies like Verizon that this is a business that’s an inefficient user of capital and they don't want to be in it. So, they're getting out of it. But at the same time other companies like your selves and CenturyLink and others, are getting much more into this business. So, I’d love to hear kind of the strategy behind it. And the second one would be with respect to the hardware sales, is there any way to use elevated hardware sales as a predictor of some of the managed services revenues on a go-forward basis? And the last one, Leigh, would be just revisiting this financing situation. Presumably, if you expected to get secured financing at some economic level, it would have been at an interest rate that would be below where your cost of borrowing is. Could you talk about, as a result of this, how much more expensive is the funding for the go-forward CapEx using cash on hand rather than using the cash on hand to retire debt and using secured funding instead? Thanks.

[Ted Torbeck:]

Okay. On the hardware sales, it is strategic to us and it gets our foot in the door in some customers. If you look at the enterprise customers and where the growth is happening, GE has been a big customer of ours. There are our largest hardware sales customers. We’ve benefited from the breakout of the consumer finance group, Synchrony. As they start that business up, we’ve been able to attain a lot of work there. And it’s really related to the economy and its cyclical based generally three or four years, where they refresh their investment. But we’re seeing more and more that our enterprise customers want one stop shopping, we’re basically all there outsource. So we think it’s critical to maintain that relationship and to continue to grow other higher value products by having hardware sales. We also strategically have work to go down market with hardware sales. It isn’t a big number but we are starting to see some sales out of the mid major market with hardware. And again the strategy is the same that they’re looking to go to one stop shopping and if you can offer all the value added services you can retain the business and even grow in some of the areas where you have higher margins. So that’s kind of our strategy in what’s happened this year.

[Leigh Fox:]

Yes. On the financing side, the way to think about it is that the deal that we were putting in front of the banks was approximately -- it wasn’t huge but it’s probably a $2 million benefit to us going through an increase in term loan versus holding wireless cash. The pricing though, the shipment pricing -- to the credit of the team Kris Elma and Kurt the Former CFO, they did a great job on that term loan. We have great relationships with the banks and we have a great term loan, very economic. The changes to that for us to be able to finance through that would probably be 75 to 100 basis points and you’ve got changes too, but the most favored [nation’s] terms also. And so we just look at it as being very cost prohibitive at this time. And since we have the wireless proceeds we have enough liquidity to sustain ourselves so that’s the route we’ll go. As I mentioned though it’s subject to market conditions, if something changes we’re constantly in discussion and if something changes we’ll make the change.

[David Barden:]

Got it, and I apologize. Could you just talk a little bit about how hardware revenue sales might be a leading indicator for the managed services side? Ted?

[Ted Torbeck:]

Well, it can be -- if you look some of our customers we’re starting to see where they don’t want to own the hardware at all. They’d rather have outsource it as more like a utility model and a part of that is managed services. But we’re not seeing that across the board. So, I mean, it’s -- I think if you look at the hardware sales it really is cyclical and it’s more in like three or four year time periods that it goes up and down. So I don’t think it’s a real good predictor I think it’s a better predictor how the economies going. But there is a trend that where people are using hardware sales as part of the managed service field entirety.

[Ted Torbeck:]

More importantly what happens is the managed services are built around the same hardware infrastructures that we’re selling the people. So, the various hardware vendors, people built the infrastructure using various vendor solutions. When you get in there to sell hardware it's – one, it’s an easier sell and then because you're in there and you're typically in there with the vendor, you're cyclically then at a table discussing some sort of managed services, that’s the direction of the company is heading. So it's hard to correlate the two, but the two are absolutely related.

[Operator:]

And now we’ll take a question from Ana Goshko with Bank of America.

[Ana Goshko:]

Thanks very much. I have two questions. First on the wireline, on the cost side if I look at both cost of service and products and the SG&A, they are each up about $3 million to $4 million both sequentially and year-over-year, I know you touched on some of the elements there but first part is, are you not capitalizing all of the labor that’s associated with the fiber rollout and is some of that bleeding in from the cost side?

[Ted Torbeck:]

Yeah absolutely, you don’t capitalize a 100% of it, but you do capitalize a portion of it.

[Ana Goshko:]

Okay. And then secondly, you talked about these projects aimed at streamlining operations. So wondering how much of that is sort of one-time and how we should think about the margin on the wireline business going forward?

[Ted Torbeck:]

Absolutely. So, what makes the wireline margin somewhat difficult to predict right now is the combination of our acceleration and the wireless impact. I would say that from a normalize basis it's -- wireline margins are probably going to get into high 30% range once we’ve divested the wireless assets and you see a pro forma view of that business. You are being impacted by what I would consider and you said it's one-time, I do consider some of the cost here one-time in nature and a lot of what we were hit with in the quarter were one-time in nature either due to accelerating headcount without the associated revenue or one-time items in healthcare, workers comp, et cetera. But I would say that you're going to probably see the next 12 months or so, you're going to see depressed margins and those should creep up a bit as we begin to get more efficient with the Fioptics acceleration. What will be really the key is the first quarter, when wireless is reported in SCOPS after we’ve officially shutdown that business, first quarter 2015, you’ll see a nice pro forma of the business and that’s exactly who you should see margins in the -- historically in the low 40s dipping down then the high 30s and then you see a normalize backup probably into those, I think low 40s over time, at least that’s where our heads are at right now, is that helpful?

[Ana Goshko:]

Yes. So the dip into the high 30s, which quarter will we see that most dramatically?

[Ted Torbeck:]

Probably the first quarter of next year.

[Ana Goshko:]

Okay. And then secondly, just on capital structure. I know you talked about it a lot, but just as you think strategically you are going to call those -- have the [indiscernible] bonds, you were initially saying that you were going to call those, are the wireless sale proceeds, now it apparently makes more sense to leave those proceeds to invest in the fiber rollout. But that call price does drop in March. So would you think about refinancing those in the market or you're just going to kind of wait for the next CyrusOne monetization to use that to take those bonds out?

[Ted Torbeck:]

The issue with refinancing those bonds is they come with some tax paying associated with things that were well beyond my -- well before my time. So ideally, when you refinance them you the pay carries and so the problem there is you can isolate them and refinance them, you can’t really combine them in a larger refinancing because you are paying via large refinancing. So the way we were thinking about that is taking those out entirely. Now depending on what we do, we may end up refinancing that depending on what the market looks like. But as you mentioned I think they if they drop down to I think two plus percent from a premium basis in March of next year I believe. So, it becomes more attractive and as I mentioned earlier in the conversation I am really looking at that timeframe and you have that happening with the subs and then you have the seniors that start looking more attractive from refinancing standpoint. So there is a lot we’ll be doing next year around that timeframe with respective capital structure.

[Operator:]

And next we’ll hear from David Hebert with Wells Fargo Securities.

[David Hebert:]

Good morning, everyone. Thanks for taking the questions. Just a follow-up on the subs and the senior refinancing, or potential refinancing next year. Do you think there is flexibility for a more attractive covenant package as well if you were to refinance those bonds, do you feel like the covenants in those indentures can hold you back in terms of your fiber expansion?

[Ted Torbeck:]

Yes. I think we’ve said this very publicly our capital structure is the capital structure built for the company we used to be. And it is if you look at our credit agreement as an example, it is a very complex nonstandard credit agreement. Yes, we absolutely think we’ll get more standardized terms and it will help the company we will be going for.

[David Hebert:]

Okay. Helpful. And last question for me, you mentioned at your Investor Day and in the presentation around additional carrier services or opportunities with Verizon. Just wondering if you could dig into that a little bit and think about or explain a little bit and explain a little bit, what’s your thinking longer term? Thanks.

[Ted Torbeck:]

Well, there is still a lot of ground to be covered here. So we can’t get into a lot of detail. But there are opportunities in small cell that we’re competing for and we talked a little bit about the retail deal that we have with Verizon. They have the highest market share in Cincinnati, so it is bringing traffic into our stores. But I don’t want to expand much more than that at this time.

[David Hebert:]

Okay, great. Thank you very much.

[Operator:]

And now we’ll hear from Frank Louthan with Raymond James.

[Alex Sklar:]

Hi, this is Alex here for Frank. I just want to follow-up on the wireline cost question. Can you talk about where you are as far as hiring technicians around the Fioptics acceleration? And then around the 6% ARPU growth for Fioptics, can you give us an idea of what the programming cost growth year to date has been and maybe provide your thinking around plans for next year's balancing Fioptics price increases versus getting more aggressive targeting Time Warner and Direct TV subs? And then lastly, can you just give us an update on what the combined Level 3 TW Telecom footprint looks like from a building connected with fiber standpoint versus your 5,000? Thank you.

[Ted Torbeck:]

So we’ve been pretty successful in the hiring of techs, we’re in the second wave. Our classes run somewhere between 25 and 30 techs. We’re -- like I said we’re in the second wave. So the first wave is through the training, which is -- can be prepared at a time. And then so they’re out been progressive. And then the second wave of roughly 30 techs is in progress were being trained. So we’re very encouraged with response we’re getting from the community as far as hiring people and we’re often running.

[Leigh Fox:]

On the ARPU side, we’ve seen as we mentioned 6% increases that’s the combination of folks coming off of promos, the mix changing over time. On the content side it’s pretty similar from the standpoint of content cost increases about 6%. I’ve always said on the video side ARPU was always a game of matching content increases. So, unfortunately with us we have to have the ability to pass those increases on to our customers and that’s really we prefer not to. But as we run the business best, that’s we’re focused on. So that’s really the trend you should see with us going forward also that, as we see content increases we try our best to pass the minimal amount we can to the customers. But we have to look for solutions, so those two should match.

[Ted Torbeck:]

And on Level 3.

[Leigh Fox:]

On the Level 3, the footprint for Level 3 and Time Warner I mean in my mind really doesn’t change very much. We have very good partnership on the wholesale side with Level 3. Time Warner’s footprint in restated in town is probably quarter of what our fiber footprint is. Level 3 their combination really doesn’t change that in any way in town. But we do remain a good partner of Level 3 and we think that will continue well into the future.

[Alex Sklar:]

Great, thank you.

[Operator:]

And now we’ll take a question from Alex Ciarnelli with SM Investors.

[Alex Ciarnelli:]

I just wanted to ask that, can you give us an update on 2015 and going-forward cash pension costs? I remember during the Analyst Day, you were hinting that maybe MAP-21 could bring positive news to you guys. So I am just wondering if you went through the exercise and there's anything to relate. Thank you.

[Leigh Fox:]

Yes absolutely. Thanks Alex. MAP-21 and some use of credit will impact 2014 by approximately $11 million. I think that brings our estimated total pension and OPEB payments down to about $20 million. On a go forward basis, the impact of MAP-21 should be about that range when you’re modeling, so it definitely has an impact on the run rate cash cost.

[Alex Ciarnelli:]

Okay, thank you.

[Operator:]

And ladies and gentlemen, this will conclude our question-and-answer session and also bring call to a close. Thank you for your participation.