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Cincinnati Bell (NYSE:CBB)
Q3 2019 Earnings Call
Nov 07, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, everyone, and welcome to CBB's third-quarter 2019 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Josh Duckworth. Please go ahead.

Josh Duckworth -- Vice President, Treasury, Investor Relations

Good morning, and welcome to Cincinnati Bell's third-quarter 2019 earnings call. On the call today are President and Chief Executive Officer Leigh Fox and Chief Financial Officer Andy Kaiser, who will recap this quarter's highlights and provide detail on our third-quarter financial performance. Following the prepared remarks, Tom Simpson, our chief operating officer, will join Leigh and Andy during the question-and-answer session. Remarks made on today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provision presented on Slide 2.

Please see today's press release and the company's recent SEC filings available on our website for a description of the potential risks and uncertainties that may cause actual results or outcomes to differ materially from those indicated or suggested by any such forward-looking statements. The presentation also contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are also available on our website with that, I am pleased to introduce Cincinnati Bell's President and Chief Executive Officer Leigh Fox.

Leigh Fox -- President and Chief Executive Officer

Thank you, Josh, and good morning, everyone. As today's release indicates, our business delivered another strong quarter of financial performance with strategic revenue growing 8% year over year. Third-quarter results were in line with Wall Street expectations, and as mentioned on last quarter's call, we are confident and we will deliver on our full-year guidance. Now turning to our IT Services business unit performance.

I'm impressed by the team's ability to continue to advance on a nonrecurring harbor reselling model to a trusted cloud services provider, focused on a longer-term recurring service contracts. As evidence of our growing expertise in this area, we were recognized as the first service provider to achieve master level certification in all five Cisco cloud managed services, demonstrating our broad expertise are across enterprise networks, collaboration, data centers and IT next-generation networks. Our innovative approach is resonated within our communications practice. During the quarter, we added an impressive 15,700 UCaaS profiles, primarily driven by recent deal with a fast-growing restaurant that has more than 700 locations spread throughout the United States.

In total, we now manage 270,000 profiles for more than 2,000 business partners across North America. Additionally, we signed new service agreements that will add $200,000 in new monthly recurring revenue once fully implemented. Turning to our cloud practice. Demand continues to be robust.

File revenue increased 15% year over year after excluding GE's enforcing initiatives, which completed during the second quarter of 2019. As mentioned last quarter, the cloud practice has 50-plus highly skilled software engineers with certifications across each of the public cloud platforms. As clients migrate from Legacy solutions, they look to us as a trusted advisor. Through this process, we're able to demonstrate our expertise and move our relationship with customers beyond transactional interaction to monthly recurring opportunities.

Moving to our entertainment and communications business. Our operating results remain strong. After a decade of investment in fiber, our combined fiber networks span over 17,000 fiber route miles throughout Greater Cincinnati and Hawaii. In our wholesale business, we provide services for approximately 90% of the wireless towers in Cincinnati and approximately 80% in the wireless cell sites in Hawaii, and remain a preferred provider of network services to other carriers.

For commercial business customers, our recognizable brand as a next-generation network provider has led to success-based build outside of our traditional operating territory. As evidence, we have recently won large commercial fiber build in adjacent metropolitan areas, which provide additional opportunity to expand our superior consumer fiber services to neighborhoods with the highest return on investment. Within our existing footprint, fiber-to-the-premise reaches 60% and addresses in Cincinnati and 50% of addresses on the Island of Oahu. Fiber-to-the-premise is a generational asset with a high barrier to entry that consistently delivers high speed with unlimited bandwidth.

Simply put, we provide the fastest and highest capacity broadband pipe to the customer's home. With that, I will now turn the call over to Andy who will discuss our consolidated and segment results for the quarter.

Andy Kaiser -- Chief Financial Officer

Thanks, Lee, and good morning, everyone. Slide 5 summarizes the company's third-quarter performance. Consolidated revenues totaled $383 million, generating adjusted EBITDA of $102 million. Turning to our entertainment and communications performance for the quarter on Slide 6.

Revenue totaled $249 million with Cincinnati contributing $171 million, and Hawaii, $78 million. Customers transitioning away from lower margin linear video programming in favor of over the top solutions drove revenue decreases in both markets. Adjusted EBITDA was $93 million, up 2% year over year. Cincinnati generated adjusted EBITDA of $68 million, consistent with the prior year.

Hawaii contributed adjusted EBITDA of $25 million, up 13% from a year ago, and remains on track to grow between 5 and 10% in 2019. Moving to Slide 7. At the end of the third quarter, Cincinnati Fioptics internet subscribers, which include the combination of fiber to the premise and fiber to the node customers, totaled 247,000, up 4% from a year ago as demand for our fiber to the premise Internet product offset the declines from fiber to the node. During the quarter, we added 3,800 fiber-to-the-premise Internet customers in Cincinnati with penetration now reaching 45%.

Fiber-to-the-premise Internet ARPU increased 5% from the prior year, totaling $54, while churn decreased 44 basis points to 1.9%. In the Hawaiian market, we've added 7,700 consumer SMB fiber-to-the-premise Internet subscribers since the close of the merger with penetration rates reaching 32%, up from 30% a year ago. Internet ARPU increased $6 from the prior year, now totaling $39. Slide 8 highlights our IT Services and Hardware segment results for the quarter.

Revenue totaled $141 million, generating adjusted EBITDA of $12 million, up 4% and 3% from a year ago, respectively, after excluding the impact from GE's decision to in-source certain cloud services. Turning to Slide 9. As Leigh mentioned earlier, the strength of our UCaaS, NaaS and SD-WAN offerings within the communications practice continues to outperform legacy decline with strategic revenue growing 37% year over year. Year to date, we've increased NaaS and SD-WAN locations by more than 1,000 each.

We've also added 31,000 hosted UCaaS profiles during the year. Moving to the summary of capital expenditures on Slide 10. We've invested $167 million year to date, including $54 million for Hawaiian Telcom. During the first nine months of 2019, we invested $28 million in construction costs to expand our fiber-to-the-premise footprint in both Cincinnati and Hawaii.

Year to date, consumer SMB fiber installation costs totaled $37 million in Cincinnati and $11 million in Hawaii. As presented on Slide 11, free cash flow totaled $34 million for the first nine months of 2019. We ended the quarter with net debt of $1.9 billion with leverage remaining consistent at 4.7 times. Liquidity was $162 million, and we maintain a gross NOL carryforward of approximately $800 million.

We remain confident that our strong capital structure and liquidity enable us to execute on our strategic objectives. As noted on Slide 12, we are on track to deliver against our previously communicated full-year revenue and adjusted EBITDA financial guidance. We also continue to expect full-year 2019 capital expenditures to be within the range of 215 to $235 million. I will now turn the call back to Leigh for closing remarks.

Leigh Fox -- President and Chief Executive Officer

Thanks, Andy. I am proud of the company's operating performance year to date and the progress achieved toward building two distinct and growing businesses. This company continues to build superior assets, deliver strong financial results while competing against larger companies. We have also built a company and culture that gives back both socially and environmentally.

Year to date, we have financially supported numerous local charities and our employees have volunteered over 10,000 service hours. On the environmental side, one vendor program helped us reduce 350,000 pounds of electronics, equating to enough energy savings, powered more than 1,300 homes per year. As we entered the final quarter of 2019 and look ahead to next year, we remain confident that our strategic initiatives have differentiated us for our peer group and positioned us for EBITDA growth in 2020. We remain focused on applying a disciplined approach to capital allocation to drive profitable growth and we continue to evaluate alternatives to maximize stakeholder value.

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

Questions & Answers:


Operator

[Operator instructions] And we'll take our first question from David Barden with Bank of America.

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

Hey, guys. It's Josh in for Dave. Thanks for taking the question. Two if I could.

How do you view the change in the demographic trends in Cincinnati and Hawaii, kind of impacting the pace of cord cutting and fiber adoption versus the national average? And then secondly, in Hawaii, it looks like DSL sub-losses are still offsetting the fiber gains. When do you think that will flip positively?

Leigh Fox -- President and Chief Executive Officer

Josh, I would say, on the first question on the trend, I'll answer that, and then I'll let Andy answer the second question. I think we see the NaaS, what's happened internationally, here in Cincinnati and in Hawaii. We definitely see a demographic-based shift, as you mentioned, to cord cutting. We are watching things like the launch of Disney+.

What that has -- the impact that has on over the top adaption. I think with more and more availability on the tax side, look at what's happening with Apple TV, I do think there is a growing trend, and it's going to continue and cutting linear television and -- we view that as a positive for us. When you have a very dense fiber network and you have -- your sole focus is building fiber-to-the-premise and offering the best and highest bandwidth pipe to the home. I think that only gives us advantage overtime.

I will say that I talk to a lot of people around supply and demand, and I think we have built more supply than there is demand, and I think once that shift happens from standpoint of usage on consumer side. I think we're in a better spot. And so as I mentioned in the script, we feel like we built a generational asset where demand will only increase for bandwidth. Look at all the studies and we think we're in a great spot as that demand inflection really meets supply, and we become one of the key suppliers, if not the only supplier as available for truly symmetric bandwidth.

So, why don't you answer the second question?

Andy Kaiser -- Chief Financial Officer

Sure. As we've discussed on multiple calls in the past, really in Hawaii, the big opportunity is driving fiber-to-the-prem penetration, and we continue to do that. So when you look -- we're currently sitting at 32%, but we clearly have a lot of opportunity to drive that upwards toward where we sit in Cincinnati, which is 45%. So it will be a combination of driving further penetration from the 32% throughout the remainder of 2019 and 2020, as well as new doors that we will open in 2020 as well.

So when you take those two in combination against kind of the fairly steady clip of fiber-to-node decline, as well as DSL decline, we should turn positive all in 2020.

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

Got it. That's helpful. Thank you for taking the question, guys.

Operator

And for our next question, we'll take Sergey Dluzhevskiy with GAMCO Investors.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Good morning, guys. First question is kind of on the portfolio. So if you look at your portfolio beyond the IT Services business and beyond obviously, the core entertainment and communications business. Do you see assets that -- where you might not get credit for or are not getting credit for that you could possibly monetize down the road, whether noncore or not central to your strategy, whether it's real estate or anything else? Anything that could be used to service value over short to medium term?

Leigh Fox -- President and Chief Executive Officer

Yeah. Sergey, this is Leigh. Yeah, absolutely. I mean you mentioned one big one for us.

Real estate. We have few projects going on right now, really strong real estate consolidation, especially in Hawaii. As you can imagine, whenever you consolidate a network -- real estate in Hawaii, first and foremost, is expensive. And also as you consolidate electronics, cost of electricity and the savings available to you is substantial.

So we have quite a few projects going on in Hawaii. Network consolidation, CO consolidation and what to do with real estate, we are a real estate owner in Hawaii. So I'm not sure that's necessarily where we want to be long-term. There's probably a mix, we'll always have some, but there is an opportunity there so we are absolutely delving into that.

It's a little less prevalent in Cincinnati as the cost of real estate, cost of electricity is -- you just don't get as much bang for your buck, but we're constantly looking at assets. We are real estate. I'm not, I mean our other -- probably the -- our other most liquid asset is the IT Services business, as we mentioned in the past. They're intentionally building two companies up, and so we've always got optionality around that.

But beyond those, EMC, IT Services, those are our two main companies. We're constantly looking at that, but the real estate will be probably the biggest one. Hopefully, that's helpful.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Right. And I guess a bigger question also related to what you just mentioned. So the stock has been obviously under pressure and the valuation into public market continues to be depressed. So as you look at your business in addition to operational execution, what options or alternatives do you see that you believe could be effective in unlocking value and eliminating those disconnects between the intrinsic value of your largely fiber centric business and valuations that so far persists in the public market.

Leigh Fox -- President and Chief Executive Officer

Yeah, I mean that's a great question. I think one of the things we suffer from kind of a sector overhang is, I'll be kind and just say that, and a lot of it, at least in the last several months, to be focused around the credit markets. We're obviously OK from a balance sheet standpoint, and we -- our debt maturities, we have plenty of time. But I didn't -- very honest about the fact that this doesn't turn.

We do have options, and we see a path over the next several years getting our leverage down into the threes. And I think that's a good place to be when you are going to refinance your long-term debt that would be our goal. And I think in doing that in this environment, we would unlock a lot of value as the perception of high leverage in this industry, given what's going on in the sector, I think has had a lot of -- has resulted in a lot of the downward pressure. And so we feel like we've got a solution for it or solutions, we still manage our cash very closely.

We have, as you're well aware, we're very intentional about investing in fiber, and investing our own cash. I think what you see from all the teams is that we've been able to hold leverage very consistently over the last several quarters. So we're very focused on it, and we do see a path. When we execute that is really just -- look, we're watching the markets, and we're going to take full advantage of our options when the time is right.

Right now we don't have to do anything. We have plenty of cash to do exactly what we're doing. We're executing. The -- I'm a believer of stocks so structure portfolio.

They go up, they go down, they go back up again, right? And so as long as we keep executing that's the one thing we can control and that team continues to that. So I see a good path forward, but right now, we're focused on execution.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

So you mentioned leverage. Ideally, where would you like to be given your asset portfolio? What is that the optimal leverage for the company of your size and the nature of your assets?

Leigh Fox -- President and Chief Executive Officer

I think in the threes is fine. I mean, look, to be candid and the fours was fine until certain issues arose in our sector. Look, we're a very capital-incentive industry. And I've read a lot recently on what the narrative is in the sector and what needs to happen.

And what needs to happen is investment. You need to invest in fiber because the companies like ours need to invest in next-generation networks. We've done that, and we continue to do that. Others need to do that.

Our leverage is high because we reinvested in fiber as an example. We've got great assets because -- but due to that fact, we have high leverage. Now again, I'm sort of watching the trends, and I'm going to -- that's going to really dictate over time what we need to do from the standpoint of leverage. But I think if you're in the threes, you're in a really great place.

I think in the -- as you've seen from us and the fours is absolutely manageable under our debt structure and capital structure. I think threes will be fantastic, but it's just to take the kind of -- it's dictated by the tone of the markets and right now the tone isn't good, and we're watching it very closely.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

And my last question is about Hawaii. So I mean you're making progress in terms of integrating those assets and basically driving operational performance. So as you look into 2020, what are your Top 2 or Top 3 operational priorities for Hawaii? What would you be putting particularly emphasis on in 2020?

Leigh Fox -- President and Chief Executive Officer

Tom, you want to --

Tom Simpson -- Chief Operating Officer

Yeah. Sergey, this is Tom. The Top 2 priorities in Hawaii is really where we're starting real estate consolidation as we consolidate some central offices and really business and consumer sales focus. We're still pushing in fiber penetration in the consumer market, and we're starting the MyWay TV launch, which is the skinnier bundle that we launched this quarter.

It's really continuing to push up penetration on the sales front and push the IT integrated services and business voice and all of that full stack inside of the business sales.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Thank you.

Tom Simpson -- Chief Operating Officer

Thanks, Sergey.

Operator

And our next question comes from Batya Levi with UBS.

Batya Levi -- UBS -- Analyst

Thank you. Couple of questions. Given the optimal leverage in the threes, how should we think about the incremental fiber build opportunity in the market? But also you were contemplating may be doing some overbuilds, some projects going forward. What does this suggest in terms of capex plan? Have you seen the peak? And when are we going to start to see that coming down? And another question on the operations.

Can you provide a little bit more color on the KPIs you're seeing in October? And maybe the competitive environment. Is there any change in connect or churn, given the price increases that charter implemented?

Leigh Fox -- President and Chief Executive Officer

Thanks, Batya. On the build side, I think the way to think about -- we definitely saw the peak a few years ago. We won't be building that aggressively. I would say that the way to think about our capex right now is sort of steady state.

I would say that what you saw in '19 is what I would consider a very steady state. Now -- then you look at where you're investing, I would say that you're going to see less investment, though we're not going to end our investment in our -- in Cincinnati, as an example, but we are seeing a lot of opportunities as we edge out and overbuild. We've won some deals in territories right outside of Cincinnati. On the business side, that has allowed us to build fiber up to those markets and also allowed us to take advantage of that fiber and building consumer neighborhoods.

And when you do it in that order, you win the business first, build the fiber line, more often the fiber. What we found is we saved on the consumer doors. We've saved about 15% on the build roughly when we go to engineer, those doors. So to me, that's a great strategy, right? We also look at those as incremental doors.

We're not cannibalizing part of our own business. These are truly incremental wins for us and that's exciting for us also. So we are gaining traction on the territory. We're seeing other business type solutions.

At least, we're being sought after, I guess, is the best way. Our reputation is good in the area we're being sought after. So look, I think it's got a very positive impact on our capital spend going forward, but I would say the majority of that would be in that overbuilt category, unless in Cincinnati, you'll see us kind of trending out of territory. The same would be in Hawaii.

In Hawaii, look, we're going to be slowly build. We're going to use government subsidy to build but it's going to be a very slow steady build. So you won't see any kind of aggressive build out of us moving forward. It really does come down to managing cash flow and managing our leverage ratio.

And in this environment we see this -- that as being the most important element and that's what we're doing. So study execution with steady build.

Batya Levi -- UBS -- Analyst

All right.

Leigh Fox -- President and Chief Executive Officer

You want to answer the metrics question, Andy?

Andy Kaiser -- Chief Financial Officer

Yeah. Batya, I apologize. Batya, on the competitive nature of the -- we're not seeing any changes in the KPIs, given spectrum's most recent announcement on pricing. We've been very, very focused since last year on reducing churn.

As I think you probably remember us talking about ARPU management, and we stated you shouldn't be focused as much on ARPU because what we are going after is retention. We believe that keeping customers is much more important to us than going after what I call these vanity metrics on the consumer side. I could ask Jason Praeter and Tom, who run Cincinnati, I could ask John, who runs in Hawaii, hey, get me subs and they could get subs overnight. It's just not the subs that we really want, or our investors really want to us have because they churn out, they cost you cash, you don't make any money from them.

So what we're really focused on is really diving into what are the subs we want and want to keep, and I think that's what you're seeing in our churn numbers and the improvement in our churn numbers. We've seen no movement yet from charter's announcement, not saying that we won't, but there's been very little time since the announcement on the pricing.

Tom Simpson -- Chief Operating Officer

And Batya, I would add to that. I would anticipate that we would continue to see, as a result of what Leigh just said, continued improvement. As we shift more and more away you see it in our numbers from fiber-to-node and DSL as those continue to come out of the base. We are then left with fiber-to-the-prem subs, that and we said this over and over, it's a superior product that we see more and more demand for bandwidth.

Folks are making their way to the fiber product because they need it.. And to Leigh's point, the way we're managing that to ensure that they were not pricing them in the event that we see them in a manner that. We're seeing stronger churn metrics year over year and I would anticipate we'll continue to see that as that trend continues.

Batya Levi -- UBS -- Analyst

Got it. Thank you.

Operator

And we'll take a question from Jay Meyers with Credit.

Unknown speaker

Hi, good morning. Thank you for taking the question. Wanted to maybe dig into that churn aspect a little bit more. So obviously, you highlighted an improvement on year-on-year basis.

We saw a little bit of a step up both in Cincinnati and Hawaii. I remember you kind of noted in last quarter that there was a price event in Cincinnati during 2Q and then one in Hawaii this quarter. Maybe just some additional color there on the churn impacts you're seeing?

Leigh Fox -- President and Chief Executive Officer

So obviously, any time that we push through the price increase, we anticipate that we're going to see some impact on churn. But the way that we've been managing this year, we mentioned it moments ago, we are looking very closely on a sub-level basis. And taking a look at that -- the contribution margins coming through, and are very closely managing the kind of promo expire moment, which is a big moment that can drive churn. So while will we'll continue to push through price increases, how we manage the based on a go-forward basis we'll be consistent with we've done in 2019.

And that is taking a look at the overall contribution margin and ensuring that when price increases happen, we do so in a logical way and don't push the subscriber out. So again, that goes back to how we're managing the base, very intentionally, not chasing video subscribers and ensuring that the customers that we do have, they are with us long term.

Unknown speaker

Great. Thank you.

Operator

And we'll take a question from Ben Brogadir with Odeon Capital.

Ben Brogadir -- Odeon Capital -- Analyst

Just a question regarding the deleveraging initiative. I know you said, you want to get down into the threes. But my question is based on your capex being kind of steady state at this number, you referenced 215 to 235. You guys are generating a little over $400 million EBITDA for the year.

And kind of given the interest payments and pension, and OPEB payments. I'm just wondering if you can kind of give the simple math around EBITDA last year and kind of cash flow items? Just wondering how you plan on kind of deleveraging to the threes? Is it just pure EBITDA growth, is there kind of non-core M&A and debt pay down associated with that? I mean, could you provide simple math around EBITDA and your cash flow items. It doesn't really paint much of a deleveraging free cash flow picture.

Leigh Fox -- President and Chief Executive Officer

Yeah. So great question. You said it, it's a combination of growth in EBITDA, M&A and proceeds of M&A that go toward paying down debt ultimately. We've been pretty honest about everything we do.

We have two companies. Ultimately, if need be, we sell assets and we get down to the threes. We're watching it very closely, the credit markets, but it's just a combination of those two things, get you down in the threes.

Ben Brogadir -- Odeon Capital -- Analyst

Understood. Maybe I could slip in one more real quick as well. Given Presidio sale that was completed late summer or early fall, they go like a 9x valuation multiple on the buyout. Obviously, you guys highlight them as a comparable to CBTS.

Wondering kind of based of that multiple evaluation, if there's been any new discussions around what to kind of do with CBTS to kind of take advantage of that comp. Thank you.

Leigh Fox -- President and Chief Executive Officer

Yeah. There's been strategic discussions.

Ben Brogadir -- Odeon Capital -- Analyst

Thank you very much for the time, guys. Appreciate it.

Leigh Fox -- President and Chief Executive Officer

Thanks.

Operator

And there are no further questions at this time. I would like to turn the conference back over to Leigh Fox for any closing remarks.

Leigh Fox -- President and Chief Executive Officer

Just want to thank everyone for joining the call today. We appreciate your interest in Cincinnati Bell, and we look forward to speaking next quarter. Have a great day.

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Josh Duckworth -- Vice President, Treasury, Investor Relations

Leigh Fox -- President and Chief Executive Officer

Andy Kaiser -- Chief Financial Officer

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

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Tom Simpson -- Chief Operating Officer

Batya Levi -- UBS -- Analyst

Unknown speaker

Ben Brogadir -- Odeon Capital -- Analyst

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