Cincinnati Bell Short by a Penny

Zacks

Telecom services provider Cincinnati Bell Inc. (CBB) reported second- quarter 2012 adjusted earnings of 5 cents per share, which fell a penny short of the Zacks Consensus Estimate. Adjusted earnings fell 2 cents from the year-ago quarter.

Revenue dropped 0.2% year over year to $368.2 million and was also below the Zacks Consensus Estimate of $369 million. The underperformance was due to weak Wireline and Wireless revenue growth that was partly compensated by strong growth in Data Center Colocation and IT Services and Hardware segments.

Adjusted EBITDA grew 2% year over year to $139.6 million in the reported quarter.

Segment Results

Wireline revenue dipped 1% year over year to $183.7 million. Lower voice revenue (down 10%) was partially compensated by higher revenues from entertainment (up 27%), long-distance and VoIP revenues (up 6%) and data (up 5%).  

Total local access lines declined 8.0% year over year to 598,500 at the end of the reported quarter, and comprised 532,800 in-territory lines and 65,700 out-of-territory lines.

The company added about 4,000 high-speed Internet customers (including Fioptics and DSL) during the reported quarter, bringing the total subscriber base to 257,600 (including 210,500 DSL broadband subscribers).

Cincinnati Bell continues to expand the availability of its Fioptics fiber-to-the-home product suite, which provides entertainment, high-speed Internet and voice services. Wireline added 3,700 Fioptics entertainment subscribers to reach 46,400 customers at the end of the second quarter.

Wireless revenues declined 11% year over year to $61.8 million due to lower equipment (down 18%) and service (down 11%) revenues.

The company exited the second quarter with 430,100 wireless customers, including 284,900 and 145,200 post-paid and prepaid customers, respectively. This compares unfavorably with 487,300 wireless customers in the year-ago quarter and 446,400 in the last quarter.

Revenues from Data Center Colocation climbed 20% year over year to $54.0 million aided by the acquisition of CyrusOne.

Data center utilization was 85% on 801,000 square feet of data center space in the reported quarter as opposed to 85% on 806,000 square feet in the year-ago quarter.

IT Services and Hardware revenues grew 2% year over year to $77.3 million. Revenues from Managed and Professional services increased 23% while Telecom and IT equipment distribution revenues decreased 7%.

Liquidity

Cincinnati Bell ended the second quarter with cash and cash equivalents of $4.1 million. This was drastically down from $90.1 million in the year-ago quarter. Net debt increased to $2.55 billion from $2.52 billion in the last quarter.

The company incurred negative free cash flow of $17.8 million compared with a positive $10.5 million in the year-ago quarter.

Outlook

For fiscal 2012, Cincinnati Bell continues to expect revenue and adjusted EBITDA of approximately $1.5 billion and $530 million, respectively.

Cincinnati Bell filed with U.S. regulators to spin off its data center business, CyrusOne, through an IPO. The company would use the proceeds to pay off CyrusOne's debt. Other details of the spin-off plans have not been disclosed.

Our Take

We believe Cincinnati Bell expects to benefit from its expanding data center business and Fioptics products that are considered key catalysts for the company’s growth in the long term. However, persistent erosion in local access lines and substantial investments undertaken to keep pace with updated technologies of Tier 1 companies such as AT&T Inc. (T) and Verizon Communications (VZ) will limit the upside potential of the stock in the short term.

We currently have a long-term Neutral recommendation on Cincinnati Bell. The stock retains a Zacks #4 (Sell) Rank for the short term.

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