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Cincinnati Bell Inc  (NYSE:CBB)
Q3 2018 Earnings Conference Call
Nov. 08, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the CBB's Third Quarter 2018 Earnings Release Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Josh Duckworth. Please go ahead.

Joshua T. Duckworth -- Vice President, Treasury, Corporate Finance, Investor Relations

Thank you, and good morning everyone. Welcome to Cincinnati Bell's third quarter 2018 earnings call. With me on the call today is our President and Chief Executive Officer, Leigh Fox, and our Chief Financial Officer, Andy Kaiser. Leigh's comments today will recap our highlights and provide an update on the merger with Hawaiian Telcom. Andy will then provide additional detail on our segment results and financial position. Following the prepared remarks, Tom Simpson, our Chief Operating Officer will join Leigh and Andy for the question-and-answer portion of the call.

Before we start, let me remind you that our press release and presentation slides for today's call are posted on our Investor Relations website. Today's call is being recorded if you'd like to listen to it at a future time. As a reminder, third quarter results include three months of Hawaiian Telcom's financial performance, as the merger closed on July 2, 2018.

In addition, in the first quarter of 2018, Cincinnati Bell changed it's segment reporting to align with our long-term strategy of building two distinct complementary lines of business. The Entertainment and Communications segment is now reported in the following three categories to highlight the success of our fiber investments. Consumer/SMB Fiber also referred to as Fioptics in the Cincinnati market, Enterprise Fiber and Legacy. To reflect the strength in our recurring strategic IT services within the IT Services and Hardware segment, revenues is reported in the following practices: Communications, Cloud, Consulting and Infrastructure Solutions, which was previously referred to as telecom and hardware sales.

Also as a reminder, the new revenue accounting standard was effective January 1, 2018 and as a result, Infrastructure Solutions sales are now reported net of cost of goods sold with prior periods also being restated for comparability.

Presented on Slide 2 is our Safe Harbor statement. 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 8-K reports.

Noted on Slide 3, the earnings release and presentation issued this morning also contain 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'm pleased to introduce Cincinnati Bell's, President and Chief Executive Officer, Leigh Fox.

Leigh R. Fox -- President, Chief Executive Officer

Thank you, Josh, and good morning, everyone. Thanks for joining us today. Our strong third quarter performance demonstrates the success of expanding our high-quality metro fiber assets to meet the accelerating need for increased bandwidth and supports the growing demand for IoT ecosystems. It also illustrates our ability to capitalize on Cincinnati Bell's 140-plus year history as a communications provider to advance our next-generation service-based IT products.

As illustrated on Slide 5, consolidated revenue for the third quarter was $387 million, generating strong adjusted EBITDA of $105 million, which includes the results from the merger with Hawaiian Telcom that closed on July 2. Hawaiian Telcom's third quarter revenue totaling $87 million was consistent with the prior quarter. Adjusted EBITDA increased 4% compared to the prior quarter totaling $23 million.

Our IT Services and Hardware segment results were also impressive. Revenue increased $54 million compared to the prior year and adjusted EBITDA was up $7 million including contributions from the acquisition of OnX.

Our long-standing reputation as a trusted IT services provider, with an understanding of network configuration is serving as well across our expanded North American footprint. I'm excited to announce Gartner recently recognized CBTS as a notable UCaaS provider when determining the 2018 Magic Quadrant for Unified Communications as a Service, Worldwide. This recognition is expected to generate additional opportunities for this business and further demonstrate our commitment to delivering agile, scalable and cost-effective solutions for our customers.

Moving to our Entertainment and Communications business. The company's early decision to accelerate our regional fiber business has created a unique network, capable of continually producing higher bandwidth and faster internet speeds than our competition. In both Cincinnati and Hawaii, demand for high-speed internet solutions continues to accelerate. As evidence, internet penetration rates in Cincinnati neighborhoods with fiber to the premise totaled 43% as compared to 29%, where fiber-to-the-node has been deployed.

Similar distinctions are also occurring in Hawaii, with internet penetration rates reaching 30% in fiber to the premise addresses, relative to 20% where fiber only reaches the node. In Cincinnati, fiber to the premise has been deployed to 459,000 homes and businesses, more than 55% of Cincinnati's total addressable market. Similarly in Hawaii, fiber to the premise is available to approximately 33% of homes and businesses throughout the state, with the majority of the fiber investment currently concentrated on Oahu. That said, I am pleased to announce, we were awarded $18 million of additional CAF II funding in Hawaii to be received over the next 10 years. These funds provide us the opportunity to continue to expand our fiber footprint to the neighbor islands and capture additional internet market share.

Moving to Slide 6. Integration efforts in Hawaii are well under way and on track with expectations and our immediate efforts remain focused on increasing internet penetration. To accomplish this, we are focused on improving overall customer experience by optimizing operational models which harmonize the construction of fiber with sales efforts and installation lead times.

In addition, we are enhancing our contact centers to streamline customer service interactions. Hawaii's operational and financial performance have improved and we are encouraged by the recent quarterly results. The combination with Hawaiian Telecom positions us to capitalize on the growing demand for fiber by adding operational scale and expanding our fiber-centric footprint. We remain confident in our ability to replicate our fiber success in Hawaii and are excited about the opportunities to cross-sell our IT services in Hawaiian market.

I will now turn the call over to Andy, who will walk you through our quarterly financial performance and outlook for the year.

Andrew R. Kaiser -- Chief Financial Officer

Thanks, Leigh. Staying with our Entertainment and Communications quarterly segment performance on Slide 7, revenue totaled $253 million, generating adjusted EBITDA of $91 million. During the quarter, Hawaiian Telecom contributed $80 million of revenue and $23 million of adjusted EBITDA to the Entertainment and Communications segment results.

Cincinnati revenue of $173 million decreased 1% compared to a year ago as we shift focus to growing our Internet subscriber base, with less of an emphasis on video, as illustrated in our metrics on Slide 8. In Cincinnati, we increased our total Internet subscriber count by 2,800 year-over-year, as growth in Fioptics more than offset DSL declines. During the quarter, we added 1,300 Fioptics Internet subscribers with penetration rates holding at 40%, due to declining relevancy of our fiber to the node offering. ARPU for the quarter increased 2% from a year ago to $51. Video subscribers decreased 1% from the prior year in Cincinnati, as customer preference shifts toward over the top programming and we increase focus on growing our Internet subscriber base. Video ARPU was $94 during the quarter, up 8% year-over-year.

In Hawaii, both internet and video subscribers increased year-over-year and remained consistent with the previous quarter, as we work toward achieving Consumer/SMB Fiber Internet penetration rates on par with Cincinnati. At the end of the third quarter, Consumer/SMB Fiber Internet penetration rate in Hawaii was 27% with an ARPU of $34. Video penetration was 21% with an ARPU of $81.

Turning to IT Services and Hardware on Slide 9, revenue was up $54 million compared to last year, primarily due to contributions from the OnX acquisition. Compared to second quarter of this year, revenue increased 3% excluding the $10 million contribution from Hawaiian Telecom. Billable resources were up 8% sequentially, generating higher consulting revenue. Adjusted EBITDA totaled $17 million for the quarter, up $7 million from a year ago.

As noted on Slide 10, the robust demand for UCaaS, SD-WAN and NaaS continues to drive significant recurring revenue. During the quarter, we increased NaaS and SD-WAN locations by 41% and 57% respectively. We also added 6,900 hosted UCaaS profiles during the quarter, raising the total to 223,000, further illustrating our success in cross selling these products throughout North America.

As outlined on Slide 11, free cash flow for the first nine months of 2018 totaled $27 million and we remain on track to generate positive free cash flow for the year. We ended the quarter with net debt of $1.9 billion, resulting in net leverage of 4.6 times consistent with the prior quarter. With both transactions closed, we remain confident that our current capital structure supports our long-term growth strategy.

As presented on Slide 12, capital expenditures were $70 million in the third quarter and $141 million year-to-date, including $21 million for Hawaiian Telcom. Capital investments for Fioptics suite of products in Cincinnati totaled $29 million in the third quarter, including construction costs of $10 million. Year-to-date, we added 26,400 new Fioptics addresses. Our Fioptics suite of products, which includes a combination of fiber to the premise and node is now available to approximately 600,000 homes and businesses or 73% of Greater Cincinnati. We now anticipate passing more than 40,000 new addresses during 2018, up from the originally communicated 35,000.

Hawaii Consumer/SMB Fiber fiber, which also includes the combination of fiber to the premise or fiber to the node is available to 65% of the residents on Oahu. Statewide in Hawaii, 237,000 addresses or 48% of the homes and businesses have been passed with a fiber product. Including Hawaiian Telecom, we're forecasting capital expenditures to be at the lower end of our $230 million to $255 million estimate for the year. Our capital allocation strategy has remained consistent and we are confident that efficiently expanding our fiber networks in Cincinnati and Hawaii are key to maximizing shareholder value.

Turning to Slide 13, we are reaffirming our revised 2018 financial guidance provided during our second quarter earnings call, which takes into account the merger with Hawaiian Telecom that closed on July 2.

I will now turn the call back to Leigh for some closing comments.

Leigh R. Fox -- President, Chief Executive Officer

Thanks, Andy. The last 18 months have been transformational for Cincinnati Bell. I am very proud of the progress we've made toward improving our growth profile by building two distinct scalable lines of business. In our Entertainment Communications segment, dense metro fiber will be the key market differentiator in our industry, and the merger with Hawaiian Telcom is a great fit. With approximately 16,000 fiber route miles within just two markets, we have locked in the fiber density value for our shareholders as demand for faster data speed and broadband continues to accelerate.

In our IT Services segment, the recent Gartner recognition as a notable UCaaS provider has quickly demonstrated our ability to effectively transition a traditional hardware reseller to a service-oriented IT solutions provider across a diversified North American customer base. We are pleased with the continued momentum in our new scale footprint and we'll continue to focus heavily on growing our high margin services revenue. As always, we will continue to invest where we are winning and remain confident in the road ahead. We will maintain a disciplined approach to capital allocation in order to deliver long-term value to our shareholders and customers.

I will now turn the call over to the operator and open it up for Q&A.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And we'll take our first question from Batya Levi with UBS. Please go ahead.

Batya Levi -- UBS -- Analyst

Can you talk a little bit about broadband footprint and maybe just focusing on the Cincinnati Bell portion, net adds continued to slow. Do you think this is sort of the new baseline run rate given competitive dynamics or is there room for improvement going forward? And maybe second question on Hawaii, as you look to expand the fiber footprint, can you talk about how we should think about CapEx going forward and maybe what's driving the low end of guidance for this year? Thank you.

Leigh R. Fox -- President, Chief Executive Officer

Hi, Batya, thanks for the question. I'll answer the first part and then I'll hand it over to Andy to answer the second part on Hawaii and CapEx. For Cincinnati, on the broadband footprint, I just wanted to remind everyone and we stated in prior calls, we have begun to focus on the right kind of subs, not just chasing the sub, what we call, internally vanity metrics. We're trying to really focus on the right types and, I think, you see that in the combination of the sub adds and ARPU. We continue to have strong ARPUs and we're driving toward the right types of subs.

I think the combination of that and we are seeing increased churn in our VDSL areas and what that shows us is that, VDSL has quickly become part of the legacy environment and the speeds that are available with VDSL just aren't good enough for our markets, customers. And all that said, where we are seeing -- where we have fiber to the prem, which is approximately 55% of our footprint in Cincinnati, we're still seeing very strong adds and great momentum. And so for us it's making sure that we build in the right ways to the right people and then we -- when we're attracting subs, we attract the right subs in the most efficient ways possible and what that leads to in our minds is a very virtuous cycle that leads to stronger cash flows, lower CapEx, and I think that's part of what you'll hear from Andy on the CapEx side. We spend less CapEx, because we are more efficient in driving the right amount of subs, the right type of subs which leads to stronger cash flows. So with that, I'll hand it over Andy for the second part.

Andrew R. Kaiser -- Chief Financial Officer

Great, thanks, Leigh. Hi, Batya. So regarding the fiber footprint in Hawaii, I think that was -- part of your question was why are we guiding toward the lower end of CapEx for 2018. So first, I'll start with Hawaii. We mentioned in the past, 65% of Oahu is covered with fiber. However, like in Cincinnati, we still have significant opportunity to continue to grow that footprint, not only on Oahu, but also on the neighbor island as well. We mentioned at the front end of the call, the CAF II funding that we've secured, so obviously that helps us with the ongoing build in Hawaii and the neighbor islands.

As it relates to why we're at the low end of CapEx, Leigh just mentioned this. We're becoming a lot more efficient as we continue to focus more on HSI installs and on self installs, we're able to free up incremental capital, and as an example of that, despite the fact that we are trending toward (inaudible) the capital guidance, we had, at the front end of the year, indicated probably 35,000 doors that we going to open up. We now will be opening probably 40,000 plus, still coming in at the low end. So it's really all about the efficiency by which we are now deploying capital.

Operator

And we'll take our next question from David Barden with Bank of America Merrill Lynch. Please go ahead.

Josh Pichler -- Bank of America Merrill Lynch -- Analyst

Just following up on Batya's question. Just make sure I have this right. (inaudible)

Leigh R. Fox -- President, Chief Executive Officer

I'm sorry, we can barely hear you.

Andrew R. Kaiser -- Chief Financial Officer

I am sorry, we can't hear you at all.

Leigh R. Fox -- President, Chief Executive Officer

Did we lose him?

Andrew R. Kaiser -- Chief Financial Officer

David, I don't know if you're still on, but we're not hearing anything.

Josh Pichler -- Bank of America Merrill Lynch -- Analyst

Can you hear me?

Andrew R. Kaiser -- Chief Financial Officer

Now, we can.

Leigh R. Fox -- President, Chief Executive Officer

Yes, now we can. There we go.

Josh Pichler -- Bank of America Merrill Lynch -- Analyst

Now you can?

Leigh R. Fox -- President, Chief Executive Officer

Yes.

Josh Pichler -- Bank of America Merrill Lynch -- Analyst

Alright, sorry about that. Just following up on Batya's question and it's Josh in for Dave. Is there reason the fiber-to-the-node subs going down as fiber-to-the-prem subs going up, is that just a shift between the two? And then second, on the competition in the market, you just kind of give a quick update there? And then, with that, what is your view on the potential competitiveness of a fixed wireless product in Cincinnati? I don't think any of the wireless guys are doing anything there yet, but do you see that as a real threat? Thanks.

Unknown Executive --

I'll answer the -- on the competitive fees. VDSL, I guess, your question is, what's driving the decline of VDSL. Honestly, it's just the lower speed when you're competition's baseline is 200 megs and they're offering up to 300, 350, a 30 meg product is really just -- it's not going to cut it. And so that's why I mentioned earlier on the call, that's really VDSL honestly in our mind, started to shift to be more of a legacy product and Spectrum honestly, it's got very good at targeting not only DSL, but also VDSL in our market, where I think they're struggling to compete with fiber to the prem. They know that they can compete with obviously a DSL product, but now a VDSL product. So that's really what's the main driver. Competition offers a baseline product that's much higher than both the VDSL and the DSL product. And so what you're seeing a higher churn and a shift to on our side where the adds are coming are all fiber to the prem which is the superior product that we offer.

So on the competition, the competitive environment hasn't really changed. In fact, it's gotten slightly better. I mean, it's been fairly consistent, but you're seeing price increases by the competition. So I wouldn't say it's staying or increasing it in competitiveness. But as we've mentioned in the past, it's always been a competitive environment. It's -- we're constantly fighting for subs with the competition, but this hasn't changed in five years. And so we've seen nothing that has changed, since the last call that would lead me to believe anything -- there has been a major shift. And honestly, it's been more positive than not, because of some of the price movement on the competition side.

And then on fixed wireless, I'm going to give you a brief answer then I'm going to hand it over to Tom for -- to give his opinion. As it stands today, as you mentioned, no wireless carrier has announced that they're coming into the market. In fact, the one carrier that's been pretty aggressive on announcements doesn't currently own spectrum in Ohio. We are obviously analyzing the impact of fixed wireless, personally we believe it's a nice mobile augmentation, but it's not replacement product, and with that, I'll hand it over to Tom.

Thomas E. Simpson -- Chief Operating Officer

Yes, Leigh is spot on the two points. The major fixed wireless provider doesn't currently have the spectrum available.

Josh Pichler -- Bank of America Merrill Lynch -- Analyst

Here or Hawaii?

Thomas E. Simpson -- Chief Operating Officer

Here or Hawaii, as a true statement. There are spectrum blocks up for auction that we're watching. As far as the threat, it's really the viability is in the highest density areas, when -- we're talking north of a 60 homes or 70 homes per mile. And looking at that, that's really more of the wholesale opportunity. As Leigh mentioned, there is some mobility augmentation, as well as, from a threat standpoint, I see that as a bit of a potential revenue shift from retail to wholesale, which is really going to lower our cost basis for support.

Josh Pichler -- Bank of America Merrill Lynch -- Analyst

Got it, OK, thanks. Thanks for taking the questions, appreciate it.

Andrew R. Kaiser -- Chief Financial Officer

Thank you.

Operator

And we'll take our next question from Sergey Dluzhevskiy with GAMCO Investors. Please go ahead.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Good morning, guys.

Leigh R. Fox -- President, Chief Executive Officer

Hey, Sergey.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Could you talk, maybe a little bit about the integration process? You touched on it in the opening remarks, but what are some of the early learnings from operations in Hawaii and maybe competitive environment since you're going up against Charter in both markets?

Leigh R. Fox -- President, Chief Executive Officer

Yes, honestly it's going very well. I think some of the comments I've heard earlier -- or read early on from analysts reports, I think one of the issues that, I think I just (inaudible) the model. I think one of the comments I saw was revenue is down in Hawaii, but EBITDA is up. Honestly, if you adjust your models for us taking gross hardware revenue to net revenue, revenues were actually on and EBITDA was up. So the -- things are going very well, going as expected or better. On the integration side, same trends. We've made great progress with the integration. They are going as expected both financially and operationally. So I think if you adjust financially, Wall Street models for the growth in the net shift, I think we're probably right on revenue and slightly up on EBITDA. So, Tom, you want to comment on anything.

Thomas E. Simpson -- Chief Operating Officer

No, that's exactly right. There's unearthed opportunities in the enterprise market for IT services and hardware, as well as, the focus on integration has really been in back office and customer care.

Leigh R. Fox -- President, Chief Executive Officer

Yes, on the competitive side, the competition on the consumer front. It's very similar. I think, except for the kind of a slight shift in emphasis between MDU and SFU, it's a very similar environment. So I think we're very well positioned to compete. And as Tom just mentioned on the business side, we see a lot of opportunity on the business front, in fact, more than we had originally thought going into the deal.

Andrew R. Kaiser -- Chief Financial Officer

And Sergey, I know you probably seen, but when you look at the -- there was nine consecutive quarters of decline from an EBITDA perspective. We were able to, in Q2, come in quarter-over-quarter in line and then, of course, this quarter, we've improved by $5 million. So all of the activity under way, you're obviously seeing come through the financials.

Leigh R. Fox -- President, Chief Executive Officer

That's Andy subtle way of saying the doom and gloom that was predicted by everyone is not happening and we've been able to stabilize and shift the business in the way that we thought we could.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Right. And a couple of questions on the IT services side. First, just a clarification. I believe you mentioned that about $10 million of IT services revenues were -- was the contribution from Hawaii, is that right?

Leigh R. Fox -- President, Chief Executive Officer

Yes.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Okay. And what was the EBITDA contribution from Hawaii to that segment?

Leigh R. Fox -- President, Chief Executive Officer

I mean it's minimal. It's take $10 million times 10%. I mean it's very minimal.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Okay. And I guess from a bigger picture perspective for IT services. If you look at the business mix, and the growth rates of various product lines that you have, how should we think about growth rates for the division in general over the next few years and what products and services within the segment shows the most promise in your opinion and will contribute to longer-term growth?

Leigh R. Fox -- President, Chief Executive Officer

Yes, great question. So I would say the -- kind of answering backwards. The area that -- the area that we're seeing the most promise today obviously communications as a service, we mentioned the Gartner report, we're seeing a lot of success in growing our communications practice. We're seeing success in the cloud front on consulting. We're seeing success on the people front, as we transition to doing more development, a little -- a mix of more development with kind of staff aug. The infrastructure practice, the traditional war as you think about it, is probably the one practice that I don't see any growth in. I think, you're going to see probably just a steady decline over time in that practice.

That said, I think the complexities around the business will be the fact that we still have some legacy customers and some legacy products even within those practices that we're migrating through and then we've got a few customers that are still going to be a headwind, one that's obviously well noted large customer of ours that's in the paper a lot that we support, and we have a great relationship with, but as our customer struggle, I think we'll see an impact from that. So that hasn't all flushed to the business yet. I would say that -- I wouldn't see it flushing through the business for another 18 months, 12 months to 18 months. So as you kind of transition through all that as we build and grow a new business through North American and part globally, you're also transitioning some of the legacy stuff and some of the customer issues you're having. So it's going to be an interesting transition. But the good news is it's growing and we're seeing a ton of momentum. So, we see a lot of success long term, and it's just going to be -- maybe a little messy in the short term because of some of the factors, if that makes sense.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Thank you.

Operator

And we'll take our next question from Arun Seshadri with Credit Suisse. Please go ahead.

Arun Seshadri -- Credit Suisse -- Analyst

Yes, hi. Thanks for taking my question. First on IT Services and Hardware, just wanted to get a sense for what margins do you think you can get to from an aspirational standpoint and maybe you can start there?

Leigh R. Fox -- President, Chief Executive Officer

As the company shifts into a larger services base, I mean, we're a pretty good services mix today. One of the issues that you're seeing is with high growth , especially high growth in services, they compress its margins because you're -- as you're selling your adding cost to deliver and if -- as you're selling the way that we're selling, you're adding a decent amount of cost to deliver. So you're going to see a compression in margins versus the aspirational view for a little while. I would say aspirationally, given the mix is the mix shift, I would say that there is the potential of getting into the high teens to maybe low '20s aspirationally but Andy, what are -- what are your thoughts on that.

Andrew R. Kaiser -- Chief Financial Officer

So obviously, if we're talking EBITDA margin, which is what I'm assuming you're -- you're referring to, we probably are looking in the low teens aspirationally, and to Leigh's point, there's just -- and I'll put specific numbers too. There is a whole lot of growth happening in communications, and we anticipate continued growth there, which will help expand margins as we move up the stack, but given the legacy decline and other pressures that Leigh mentioned, we're probably looking in the -- in the low teens. Now, Arun -- now, you've seen the difference between the finances -- finance guy's glass half empty and the CEO's glass half full view of aspirations. So, but I would say that's a good -- look, it's a good -- you can only target from those two views. There is a lot of moving parts and there's a lot of tailwinds to that business, and we're really encouraged by it, but we're monitoring it very closely, but there is definitely a shift going on. So a lot of positive things.

Arun Seshadri -- Credit Suisse -- Analyst

Got it. Okay, that's helpful context. Just wanted to get a sense for how low -- as you go through the transition from a modeling standpoint, how low should we expect the EBITDA margins to go, I guess, at the bottom of the -- at the top of the investment cycle?

Leigh R. Fox -- President, Chief Executive Officer

Andy, why don't you to take this one. I don't know that they're going to get much lower but, why don't you, from a transition standpoint?

Andrew R. Kaiser -- Chief Financial Officer

No, again, if we're talking across, Arun, are you talking across the consolidated business?

Arun Seshadri -- Credit Suisse -- Analyst

Just IT service and then hardware.

Andrew R. Kaiser -- Chief Financial Officer

Okay. I don't think we'll see -- I don't think we'll see any real significant compression. With Leigh's comments regarding a large customer of ours, there could be -- there could be a margin impact, but again I don't anticipate that it's a sustained margin impact. I really think that we settle in at the low teen over the course of the next couple of years, but there likely could be a dip in '19 just depending upon the pace with which -- with which we see on the large customer that Leigh was referencing. There are a lot of unknowns with that customer right now and we're monitoring it very closely. We have a really good relationship with them, their positives and negatives, but we are monitoring the negatives very closely as you can imagine.

Arun Seshadri -- Credit Suisse -- Analyst

Got it. Great, thank you. And then just a broader question debt related, how comfortable are you with your leverage where it stands today in the mid-to high-4s and just a sense for, like, do you have any plans or any sort of focus on trying to inorganically reduce leverage in the near term? Thanks.

Leigh R. Fox -- President, Chief Executive Officer

Yes, it's a great question. I think you know because of where we sit -- in the industry we sit in we're, I think, somewhat fundamentally disadvantaged from a growth standpoint because if you look at what fiber providers invest and their levers, kind of the pure play guys. On the positive side of our business, the growing side of our business, where we're investing in fiber, we see similar growth rates, but those growth rates are obviously compressed by kind of the nature of our business in the legacy compression that you see from that part, the legacy shrink -- shrinkage on an annual basis versus what we are growing in fiber.

So the disadvantage is really we could be going much faster and we have different arguments internally, should we be going much faster because we're waiting -- we're investing it to the prem, we're winning, but honestly, the thing that holds us back is leverage and the fact that in our industry, the leverage profile is a big deal and the debt -- and the balance sheet is a big deal, and the management of that is the major -- has a major impact on our equity. And so, we're very conscious of that and so we're constantly looking at ways of managing the balance sheet, managing debt down from an organic standpoint, and as we mentioned in the call earlier, this whole cycle of bringing in the right types of customers, not chasing vanity metrics, because if you think about, I could look at Tom and others in the (inaudible) go after subs.

But what that does is, I could have really good sub numbers, right, and you would be all very impressed with my sub numbers, but then what you see underneath that is our decreased EBITDA, our increased capital and our decreased cash and partly because we've grabbed the wrong subs, right. And some of the subs may never pay us, some of those subs, come in at a lower ARPU, because we've had to grab them at a lower ARPU and every one of those subs have a lower return and you spend money going after all those subs. So part of what you're hearing us say is, we're trying to get incredibly efficient about who we add, how we add them in order to drive the right amount of capital, the right amount of cash, so that we can manage both growth an investment in fiber and the future while we're managing the balance sheet. And honestly, that's a very delicate balance, and so there are opportunities, but that's what we're balancing right now and again a large part of it has to do with we understand the nature of where we sit in our sector and the ecosystem, and the fact that debt is important, and it's a major impacting factored equity.

Arun Seshadri -- Credit Suisse -- Analyst

Appreciate that. Thank you.

Operator

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

Spencer Gantsoudes -- Morgan Stanley -- Analyst

Hi, it's Spencer for Simon. Thanks for taking the questions. Just a couple of quick ones. Can you give us your latest outlook on synergies and any change from your original targets in terms of magnitude or time to achieve? And then what's the outlook for integration restructuring spend for next year is that be flatter or down versus '18? Thanks.

Leigh R. Fox -- President, Chief Executive Officer

Hey, Spencer. So on your first question, as you recall, we identified $10.8 million with the HCOM merger and we identified $10 million with the OnX acquisition and we are well on our way. We actually are absolutely on track to achieve and actually I would say overachieve. So on the $10.8 million, we're more than halfway there with the remainder absolutely identified and as I've mentioned, certainly the opportunity to overachieve in that regard. OnX, the same holds through there, more than -- significantly more than halfway there by the end of '19 fully achieve the $10 million debt that we had laid out and again, that's -- and I think Leigh mentioned this a moment ago, we always have and always will closely watch the structure of -- bones of the businesses that we run and we are continually looking to be as efficient as we can. So we'll continue to drive that out. So sometimes we talk in terms of synergies, but really ongoing activity will allow us to be more efficient in '19 and beyond.

Spencer Gantsoudes -- Morgan Stanley -- Analyst

And then on integration spend going forward?

Leigh R. Fox -- President, Chief Executive Officer

The actual integration spend, it will be very light, if any. Most of the integration spend -- the immediate integration spend -- most of the integration spend comes heavy than the initial integration, then tails off and it's pretty much tailed off. So you shouldn't see a huge amount.

Andrew R. Kaiser -- Chief Financial Officer

You'll see some flow through the year, but it won't be anywhere near what you've seen this year.

Spencer Gantsoudes -- Morgan Stanley -- Analyst

Okay. And then on CBTS, are you guys expecting typical seasonality in the fourth quarter, so little bit better revenue than you would see in 3Q?

Leigh R. Fox -- President, Chief Executive Officer

Yes, right now, absolutely, but obviously a lot of that is driven by one-time sales and those one-time sales are hard to predict. But yes, I mean, as we sit here today, we -- I see nothing that anyone's put in front of me that would change my view on that. But again it's all based on end of the year -- kind of end of budget season purchases by our customers.

Unknown Analyst -- -- Analyst

Got it. Okay, thanks so much.

Leigh R. Fox -- President, Chief Executive Officer

Thanks Spencer.

Operator

And our last question today is from Jennifer Fritzsche with Wells Fargo. Please go ahead.

Jennifer Fritzsche -- Wells Fargo Securities -- Analyst

Great, thank you. I wanted to ask, you touched on this, but IT services, you mentioned thinking the most efficient way for the capital structure, the stock seems under pressured. Do you feel like there is this misunderstanding? You clearly have a strong track record of buying assets and then selling them and making something out of them, CONE is the classic example. How early are you in thinking about this? I mean since this is still fairly new to you, are we way early even thinking about this are there -- are there incoming inquiries of interest, I guess, I'm just trying to explore that point a little bit more? Thank you.

Leigh R. Fox -- President, Chief Executive Officer

Yes, thanks, Jennifer, appreciate the question. Yes, I think it's misunderstood. I think what I've sort of seen is the fortunate, unfortunate part of dealing in the public markets as you're guilty until proven innocent on almost everything. And so, I think we do have a track record. I think we're proving it now. That is one asset that I think we are absolutely proving it on and to your point on timing, everything -- what it comes down to is the right time to maximize value and -- from a management standpoint. And for me, that asset's got a lot of tailwind behind it. It's -- we're seeing a lot of success. So I wouldn't say we're early on in our thinking. I mean, it's quite obvious what we're thinking with that asset. I mean, we've split it from a organizational standpoint and a financial reporting standpoint. So it's pretty obvious where our heads are at.

I don't know that it happens next month period, but within the 24-month period, maybe, right, but it really comes down to when you look at the mix of that business, we feel like comparatively, when you look at different companies of the same ilk that are out in the public market. We have a better mix of services. It is a very impressive company and what we're trying to do is basically put the pieces together to make sure that it -- everyone sees that and when we feel like everyone sees that, then I think it's the time. And to answer your question on inbound calls, yes, I mean, I get called all the time. So, yes there are calls , there is interest and we get calls. We get calls on our assets all the time. I mean, it's no different across the board. So, yes. I would say we're early on, but it's pretty obvious what we're doing and we just want to do the right thing for that asset, and the shareholders.

Jennifer Fritzsche -- Wells Fargo Securities -- Analyst

And Leigh, if I may, and maybe this is one for Andy but if that did get accomplished and -- if I guess, how would you prioritize your wish list with potential capital to first delever or buy more assets, build out more or just stay fiber-centric?

Leigh R. Fox -- President, Chief Executive Officer

I think, it's fiber-centric and debt, right. I think you use proceeds to pay down debt, and then you continue with your fiber-centric builds. I mean, I think, if you pay down debt with that, it gives a little room to maybe accelerate some of your fiber builds, not kind of out of control, because operationally it's inefficient to go too fast with fiber builds, but I think it allows you to maybe increase the speed in which you're building fiber a little bit and then you've got a healthier balance sheet and you get closer and closer to being more of a pure fiber-centric company over time. And I think that would be the idea.

Jennifer Fritzsche -- Wells Fargo Securities -- Analyst

Great, thank you.

Andrew R. Kaiser -- Chief Financial Officer

Thanks, Jennifer.

Operator

And with no further questions, I'd like to turn the call back over to Leigh Fox for any additional or closing remarks.

Leigh R. Fox -- President, Chief Executive Officer

In closing, Cincinnati Bell has a proven track record for successfully executing its strategy and I'm confident this team will continue to capitalize on the significant opportunities for the future in each of our two businesses. Thank you for participating today and the continued interest in Cincinnati Bell, and have a great day.

Operator

And this concludes today's call. Thank you for your participation. You may now disconnect.

Duration: 44 minutes

Call participants:

Joshua T. Duckworth -- Vice President, Treasury, Corporate Finance, Investor Relations

Leigh R. Fox -- President, Chief Executive Officer

Andrew R. Kaiser -- Chief Financial Officer

Batya Levi -- UBS -- Analyst

Josh Pichler -- Bank of America Merrill Lynch -- Analyst

Unknown Executive --

Thomas E. Simpson -- Chief Operating Officer

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Arun Seshadri -- Credit Suisse -- Analyst

Spencer Gantsoudes -- Morgan Stanley -- Analyst

Unknown Analyst -- -- Analyst

Jennifer Fritzsche -- Wells Fargo Securities -- Analyst

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