Cincinnati Bell (CBB) reported first quarter 2011 adjusted earnings of 8 cents per share, ahead of the Zacks Consensus Estimate of 6 cents but well below 12 cents earned in the year-ago quarter.
Revenues spiked 11% year over year to $360.8 million in the reported quarter and inched past the Zacks Consensus Estimate of $344 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 increased 12.1% from the year-ago quarter to $142.4 million, representing the highest EBITDA since 2002.
Segment Results
Wireline revenue dipped 2% year over year to $183.9 million. Lower voice revenue (down 10%) and other revenue (down 14%) were partially offset by higher revenues from Entertainment (up 87%) and long-distance and VoIP (up 9%). Data revenue was flat year over year.
Total local access lines declined 6.8% year over year in the reported quarter to 663,600, comprising 590,800 in-territory lines and 72,800 out-of-territory lines. The rate of access line losses was the lowest in the last seven quarters.
The company added 2,400 high-speed Internet customers (including Fioptics and DSL) during the reported quarter, bringing the total subscriber base to 258,500 (including DSL broadband subscribers of 228,200).
Cincinnati Bell continues to expand the availability ofits Fioptics fiber-to-the-home product suite, which provides entertainment, high-speed Internet and voice services.Wireline added 2,500 Fioptics entertainment subscribers to reach 30,600 customers at the end of the first quarter.
Wireless revenues fell 2% year over year to $71.4 million due to lower service revenues (down 6%), partially compensated by equipment revenues (up 47%).
The company exited the quarter with 503,900 wireless customers, including post-paid and prepaid customers of 341,900 and 162,000, respectively. This compares unfavorably with 523,300 wireless customers at the end of year-ago quarter. Post-paid churn remained flat while prepaid churn improved to 5.5% from 6.2% in the year-ago quarter. Post-paid average revenue per user (ARPU) was $48.90, down from $49.17 in the year-ago quarter. Prepaid ARPU was stable year over year at $29.52.
Revenues from Data Center Colocation shot up 117% year over year to $43.4 million aided by the acquisition of CyrusOne.
Data center utilization increased to 90% on 659,000 square feet of data center space in the fourth quarter from 88% on 639,000 square feet at the end of fiscal 2010.
IT Services and Hardware revenues climbed 36% year over year to $70.3 million attributable to high demand for hardware. Revenues from Telecom and IT equipment distribution, Professional services and Managed services increased 46%, 23% and 17%, respectively.
Liquidity
Cincinnati Bell ended the first quarter with cash and cash equivalents of $84 million, drastically down from $576.8 million in the year-ago quarter. Net debt remained unchanged at $2.4 billion from the last year.
The company generated free cash flow of $10.8 million in the reported quarter compared with $39.7 million in the year-ago quarter.
Guidance
For fiscal 2011, Cincinnati Bell expects revenue and adjusted EBITDA of approximately $1.4 billion and $530 million, respectively. Free cash flow is projected at $5 million.
Our Analysis
Cincinnati Bell remains committed to expanding its data center business and Fioptics platform going forward. We believe the company has stable long-term prospects owing to its 3G wireless service coupled with handset offerings that are expected to drive data revenue growth ahead. Further, a strong cash flow with no debt maturities until 2017 and beyond should support data center expansion.
Although there is no short-term debt maturity, we remain concerned about the ongoing expansion and substantial investments made by the company to keep pace with the technological advancements made by its peers. 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 its technology toward wireless services. Also, theintegration of CyrusOne might be challenging and time consuming.
We are currently maintaining a long-term Neutral rating on Cincinnati Bell with the Zacks #4 (Sell) Rank.
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