Cincinnati Bell (CBB) announced third quarter results with adjusted earnings per share of 11 cents, falling short of the Zacks Consensus Estimate by a penny. However, this was above the year-ago EPS of 10 cents.
 
Adjusted EPS excludes special items such as restructuring charges, loss on disposal of assets and gain on extinguishment of debt. Net income increased 4% year over year to $28 million while revenue fell 3% from the prior-year quarter to $338 million as a result of the declines across wireline and wireless segments.
 
Wireline Segment
 
The company reported wireline revenues of $191 million down 5% from the year-ago quarter. Lower voice revenues (down 14% year over year to $83 million) and long-distance revenues (down 3% to $24 million) were partially offset by an increase in revenues from data services (up 2% to $70 million).
 
At the end of the quarter, total local access lines reached 737,800 (down 6.8% year over year), including 664,100 in-territory lines and 73,700 out-of-territory lines. Growth in residential and business access lines in the expansion markets continue to partially offset losses in traditional consumer access lines. The company reported a total of 234,500 DSL broadband subscribers, representing a 1.5% annualized growth.
 
Cincinnati Bell remains challenged by the aggressive roll-out of Voice-over-Internet Protocol (VoIP) and long-distance services by Tier-1 carriers such as AT&T (T) and Verizon (VZ) in Cincinnati and Dayton and local phone services offered by cable TV operators such as Time Warner Cable (TWC).
 
Wireless Segment
 
Revenues from the wireless segment reached $78 million, down 4% over the prior-year quarter. Wireless service revenue declined 4% year over year to $72 million and equipment revenues decreased 8% to $6 million. Growth in data revenue driven by increased smartphone adoption was more than offset by lower voice revenue.
 
Approximately 6,000 new smartphone activations were registered in the quarter. Increased market adoption of these devices has been a primary catalyst behind the 23% year over year growth in data ARPU (average revenue per user), resulting in year over year improvement in postpaid ARPU.
 
The company reported a total of 536,300 wireless customers (down 5% year over year) at the end of the quarter, including total postpaid and prepaid wireless customers of 383,500 and 152,800, respectively.
 
Technology Solutions
 
Revenues for this segment registered $78 million, up 7% year over year. Telecom and IT equipment revenue increased 5% year over year to $45 million while data center and managed services revenues grew 10% to $28 million. Utilization rate of the company’s data center capacity decreased to 80% in the quarter from 88% reported a year ago.
 
Outlook
 
Cincinnati Bell reaffirmed its guidance for 2009 with revenues projected in the range of $1.3 billion to $1.4 billion. The company continues to expect adjusted EBITDA of approximately $480 million (similar to 2008 level) and free cash flow of roughly $150 million.
 
We believe Cincinnati Bell has stable long-term prospects driven by its 3G wireless service coupled with premium handset offerings that are expected to drive data revenue growth and restrict churn (customer switch) in the future reporting periods.
 
However, we remain concerned about the highly leveraged balance sheet and limited liquidity, which may affect future capital spending on data center expansion and network infrastructure deployments.
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