We are maintaining our long-term Neutral recommendation on telecom services provider Cincinnati Bell Inc. (CBB) considering its second quarter results and debt-loaded balance sheet.
The company’s debt exposure may affect its ongoing expansion efforts primarily related to the wireless and broadband network infrastructure expansion and build-outs of additional data center space. Additionally, Cincinnati Bell continues to experience erosion in local access lines as Tier-1 competitors such as AT&T Inc. (T) and Verizon Communications (VZ) shifted their technologies to wireless services.
The second quarter results were mixed. Adjusted earnings were below the Zacks Consensus Estimate and year-ago earnings despite strong revenue and EBITDA performances. Cincinnati Bell expects revenue and EBITDA growth to continue. The company’s Data Center Colocation and IT Services and Hardware segments are doing well while Wireline and Wireless segments are the underperformers.
In the wireline business, the company’s Fioptics products are gaining popularity since their introduction in 2009, covering 90,000 homes at the end of second quarter and an expected reach of about 150,000 by the end of 2011. However, access lines continued to decline in the second quarter, though at a lower pace compared with the previous years. We expect the similar trend to continue in the future.
On the wireless front, Cincinnati Bell is enjoying strong demand for its 3G smartphone offerings from Google Inc.‘s (GOOG) Android, Research In Motion Limited (RIMM) Blackberry and Microsoft Corp. (MSFT) Windows operating system. Although these offerings will likely impact margins in the near term due to higher handset subsidy, the increased adoption of smartphones will continue to improve subscriber additions in the upcoming quarters and post-paid average revenue per user in the long term.
Further, the acquisition of CyrusOne increases the scale and scope of the company’s data center operations. It makes Cincinnati Bell one of the largest data center companies in the U.S. and strongly positions the company to manage its global data center requirements with highly cost-efficient and flexible solutions. Cincinnati Bell is eying further data center expansion in domestic and international markets.
We believe recent acquisitions, expansion of data center business and Fioptics products, and increased smartphone adoption lay a strong foundation for the company’s growth throughout the year.
Given the pros and cons, we have a neutral stance at present. For the short term (1-3 months), the stock retains a Zacks #3 Rank (Hold).
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