Cincinnati Bell (CBB) announced second-quarter adjusted earnings per share (EPS) of 11 cents, which surpassed the Zacks Consensus Estimate by a penny. Earnings were flat year over year.
 
Cincinnati Bell completed the acquisition of data center operator CyrusOne for $525 million during the quarter.
 
Revenues upped 3% year over year to $338.6 million as a result of the increase in Telecom and IT equipment revenues, offset by declines across wireline and wireless segments. Adjusted EBITDA increased 6.5% to $125.4 million from the year-ago quarter driven by higher revenues and continued expense management. This represents the highest quarterly adjusted EBITDA since the third quarter of 2004.
 
Segment Results
 
Wireline: Revenues from the Wireline segment dropped 3% year over year to $186.7 million. Lower voice revenues (down 9% to $79.3 million) and data services revenues (down 2% to $68.2 million) were partially offset by higher revenues from long-distance and VoIP (up 9% to $26.2 million).
 
Total local access lines reached 699,000 (down 7% year over year), including 625,000 in-territory lines and 74,000 out-of-territory lines. Losses in business access lines continue to partially offset growth in traditional consumer access lines.
 
High-speed Internet subscriber base reached 249,000 (including DSL broadband connections of 233,200). Cincinnati Bell’s wireline results include its Fioptics services that use fiber-to-the-home network to offer entertainment, voice and broadband Internet services. The company exited the quarter with 17,000 Fioptics entertainment subscribers and 15,800 Fioptics broadband customers.
 
Wireline added 3,000 Fioptics entertainment subscribers and 1,000 high-speed Internet customers (including both Fioptics and DSL) during the second quarter.
 
Wireless: Revenues from the wireless segment fell 4% year over year to $68.8 million on account of lower service revenues (down 4%) as well as equipment revenues (down 6%).
 
Post-paid average revenue per user (ARPU) improved to $50.75 from $48.43 in the year-ago quarter owing to increased smartphone adoption. Total smartphone subscriber base reached to 85,600 at the end of the second quarter, up 46% from the year-ago quarter. Prepaid ARPU increased $1.59 year over year to $29.59 as the company focused on higher revenue rate plans.
 
Cincinnati Bell exited the quarter with 509,800 wireless customers, including post-paid and prepaid customers of 357,400 and 152,400, respectively.
 
Technology Solution: Revenues from this segment climbed 27% year over year to $87 million. Telecom and IT equipment revenues increased 31% to $43.4 million while data center and managed services revenues grew 21% to reach $37.1 million. Professional service revenues also rose 33% year over year. Revenues were aided by the acquisition of CyrusOne completed on June 11, 2010.
 
Utilization rate of the company’s data center capacity declined to 86% from 90% in the sequential quarter.
 
Liquidity
 
Cincinnati Bell generated free cash flow of $30.9 million, down from $61.3 million in the year-ago quarter. Capital expenditure was $30.9 million versus $48.5 million in the year-ago quarter. Net debt leaped 27% to $2.5 billion in the second quarter from $1.9 billion at the end of the fourth quarter 2009.
 
Outlook
 
Cincinnati Bell revised its outlook for 2010 based on strong first-half results and the acquisition of CyrusOne. The company reiterated its revenue guidance of $1.3 billion but raised its adjusted EBITDA guidance to $500 million (including CyrusOne) from its previous expectation of $460 million. Free cash flow is expected to be $120 million as against its previous expectation of $130 million.
 
Our Analysis
 
Cincinnati Bell’s technology solution business is delivering encouraging growth driven by the company’s continued initiatives to invest in expanding data center capacity. The company acquired CyrusOne in June and remains committed to expand its data center operation and Fioptics platform in 2010.
 
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 going forward. 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.
 
We are currently recommending our Neutral rating on Cincinnati Bell with Zacks #3 (Hold) Rank.
 
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