Cincinnati Bell (CBB) announced depressed third quarter results with adjusted earnings per share of 6 cents, which was below the Zacks Consensus Estimate of 10 cents as well as the year-ago earnings of 11 cents. Higher interest expense related to the acquisition of CyrusOne in June 2010 and higher interest rates on the company’s debt led to the decline in adjusted earnings.
However, revenues upped 4% year over year to $352 million and was in line with the Zacks Consensus Estimate. The increase in revenue was driven by higher Telecom and IT equipment revenues, partially offset by declines across Wireline and Wireless segments.
Adjusted EBITDA increased 9% to $131 million from the year-ago quarter driven by solid data center services and a healthy Fioptics fiber-to-the-home products suite. This represents the highest quarterly adjusted EBITDA since 2004.
Segment Results
Wireline: Revenues from the Wireline segment fell 2% year over year to $185.2 million. Lower voice revenues (down 8%) and data services revenues (down 2%) were partially offset by higher revenues from long-distance and VoIP (up 12%).
Total local access lines reached 686,900 (down 6.9% year over year) in the reported quarter, including 612,300 in-territory lines and 74,600 out-of-territory lines. Losses in business access lines continued to partially offset growth in traditional consumer access lines.
High-speed Internet subscriber base reached 251,300 (including DSL broadband connections of 231,500). Cincinnati Bell continues to expand the availability ofits Fioptics fiber-to-the-home product suite, which provides entertainment, high-speed Internet and voice services and attained a customer penetration rate of approximately 30% at quarter end.
Wireline added 3,900 Fioptics entertainment subscribers and 2,300 high-speed Internet customers (including both Fioptics and DSL) to reach 20,900 and 19,800 subscribers, respectively, during the third quarter.
Wireless: Revenues from the wireless segment dropped 6% year over year to $72.8 million on account of lower service revenues (down 6%) as well as equipment revenues (down 76%).
Post-paid average revenue per user (ARPU) improved to $50.31 from $49.27 in the year-ago quarter owing to increased smartphone adoption. Total smartphone subscriber base reached 87,000 at the end of the third quarter, up 35% from the year-ago quarter. Prepaid ARPU increased $1.20 year over year to $29.90 as the company focused on higher revenue rate plans.
Cincinnati Bell exited the quarter with 501,100 wireless customers, including post-paid and prepaid customers of 348,800 and 152,300, respectively.
Technology Solution: Revenues from this segment climbed 27% year over year to $102.6 million aided by the acquisition of CyrusOne. Data center and managed services revenues jumped 79% and Professional service revenues climbed 33% year over year. However, Telecom and IT equipment revenues dropped 7% year over year.
Utilization rate of the company’s data center capacity increased to 87% from 86% in the previous quarter.
Liquidity
Cincinnati Bell generated free cash flow of $33.4 million, down from $35.3 million in the year-ago quarter. Capital expenditure was $43 million versus $47.5 million in the year-ago quarter. Net debt leaped 26% to $2.4 billion in the third quarter from $1.9 billion at the end of fourth quarter 2009.
Outlook
Cincinnati Bell reiterated its 2010 guidance of $1.3 billion in revenues, $500 million (including CyrusOne) in adjusted EBITDA and $120 million in free cash flow.
Our Analysis
Cincinnati Bell remains committed to expanding its data center operation and Fioptics platform going forward. We believe increased smartphone adoptions coupled with 3G services continue to boost data revenue per user.
Although management remains optimistic about opportunities for its wireless and technology solution businesses, we remain cautious about the company’s highly leveraged balance sheet and accelerated wireline erosion. Moreover, theintegration of the recently completed acquisition of CyrusOne is challenging and time consuming.
We currently have a long-term Neutral rating on Cincinnati Bell with the Zacks #3 Rank (Hold).
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