Cincinnati Bell (CBB) reported fourth quarter 2010 adjusted earnings of 3 cents per share, missing the Zacks Consensus Estimate of 7 cents and well below 10 cents earned in the year-ago quarter. Higher depreciation, amortization and interest expense associated with the acquisition of CyrusOne in June 2010 led to the decline.
Fiscal 2010 adjusted earnings were 31 cents compared with 42 cents in the prior year.
Revenues upped 5% year over year to $362.8 million in the fourth and surpassed the Zacks Consensus Estimate of $361 million. The increase in revenue was driven by higher Data Center Colocation as well as IT Services and Hardware revenues, partially offset by declines across Wireline and Wireless segments. Adjusted EBITDA nudged up 3% to $122.8 million from the year-ago quarter.
Fiscal 2010 saw year-over-year increases of 3% in revenue to reach $1.38 billion and 7% in adjusted EBITDA to reach $501.6 million. Adjusted EBITDA exceeded $500 million for the first time since 2003.
Cincinnati Bell lived up to its own expectations for fiscal 2010 revenue, EBITDA and free cash flow.
Segment Results
Wireline: Revenue from the Wireline segment fell 3% year over year to $182.9 million in the reported quarter. Lower voice revenue (down 10%) and data services revenue (down 1%) were partially offset by higher revenue from Entertainment (up 104%) and long-distance and VoIP (up 3%).
Total local access lines declined 6.8% year over year in the reported quarter to 674,100. The loss was, however, lesser than a 7.2% decline recorded in the year-ago quarter. Access line loss includes 600,500 in-territory lines and 73,600 out-of-territory lines.
The company added 8,500 high-speed Internet customers (including Fioptics and DSL) during the quarter. The high-speed Internet subscriber base reached 256,100 (including DSL broadband subscribers of 228,900).
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, and attained a customer penetration rate of approximately 30% at quarter end.Wireline added 28,000 Fioptics entertainment subscribers to reach 79,000 customers by the end of the fourth quarter.
Wireless: Revenues from the Wireless segment fell 9% year over year to $69.5 million on account of lower service revenues (down 8%) as well as equipment revenues (down 22%).
Post-paid average revenue per user (ARPU) was flat with the year-ago quarter at $48.87. The total smartphone subscriber base reached 105,000 at the end of the fourth quarter, up 24% from the year-ago quarter. Cincinnati Bell added 12,000 smartphone subscribers during the quarter.
The company exited the quarter with 509,000 wireless customers, including post-paid and prepaid customers of 351,200 and 157,800, respectively.
Data Center Colocation: Revenues from this segment shot up 118% year over year to $40.6 million aided by the acquisition of CyrusOne.
Data center utilization increased to 88% on 639,000 square feet of data center space in the fourth quarter from 87% on 446,000 square feet at the end of the year-ago quarter.
IT Services and Hardware: Revenues from this segment climbed 12% year over year to $78.2 million attributable to strong demand for hardware. Revenues from Managed services, Professional services and Telecom and IT equipment distribution increased 24%, 12% and 9%, respectively.
Liquidity
Cincinnati Bell ended fiscal 2010 with cash and cash equivalents of $77.3 million compared with $23 million in the prior year. Net debt increased 26% to $2.4 billion from the year-ago level of $1.9 billion.
The company generated free cash flow of $44.8 million in the fourth quarter, down from $57.2 million in the year-ago quarter. In 2010, free cash flow reduced to $148.8 million from $164 million in 2009.
During the reported quarter, Cincinnati Bell repurchased approximately 4 million shares for $10 million.
Guidance
For fiscal 2011, Cincinnati Bell expects revenue and adjusted EBITDA of approximately $1.4 billion and $530 million, respectively. Free cash flow is expected to be $5 million.
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. However, we remain cautious about the company’s highly leveraged balance sheet and accelerated wireline erosion.
We believe the shift toward wireless services by Tier-1 competitors such as AT&T Inc. (T) and Verizon Communications (VZ) has accelerated access line erosion. In addition, the CyrusOne integration is both 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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