Telecom services provider Cincinnati Bell Inc. (CBB) has reported second quarter adjusted earnings of 7 cents per share, missing the Zacks Consensus Estimate by a penny and deteriorating 4 cents from the year-ago earnings.
Revenues grew 8.5% year over year to $367.5 million in the reported quarter but was below the Zacks Consensus Estimate of $357 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 5.8% from the year-ago quarter to $137.2 million and represents the highest first half EBITDA since 2002.
Segment Results
Wireline revenue dipped 1% year over year to $185.2 million. Lower voice revenue (down 10%) was partially offset by higher revenues from entertainment (up 74%), long-distance and VoIP (up 5%) and data revenue (up 3%).
Total local access lines declined 6.92% year over year to 650,600, comprising 578,800 in-territory lines and 71,800 out-of-territory lines. The rate of access line losses improved from 7.11% in the year-ago quarter.
The company lost 3,000 high-speed Internet customers (including Fioptics and DSL) during the reported quarter, bringing the total subscriber base to 257,900 (including DSL broadband subscribers of 224,600).
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. Wireline added 3,000 Fioptics entertainment subscribers to reach 33,300 customers at the end of the second quarter.
Wireless revenues fell 5% year over year to $69.7 million due to lower equipment (down 19%) and service revenue (down 1%).
The company exited the quarter with 487,300 wireless customers, including post-paid and prepaid customers of 331,400 and 155,900, respectively. This compares unfavorably with 509,800 wireless customers at the end of year-ago quarter. Post-paid and prepaid churn remained flat at 2.2% and 6.3%, respectively. Post-paid average revenue per user (ARPU) was $50.74, up from $48.90 in the previous quarter. Prepaid ARPU declined 6% year over year to $27.71.
Revenues from Data Center Colocation shot up 83% year over year to $45.1 million aided by the acquisition of CyrusOne.
Data center utilization increased to 90% on 669,000 square feet of data center space in the second quarter from 86% on 621,000 square feet in the year-ago quarter.
IT Services and Hardware revenues climbed 22% year over year to $75.7 million attributable to high demand for hardware. Revenues from Telecom and IT equipment distribution, Managed services and Professional services increased 23%, 22% and 11%, respectively.
Liquidity
Cincinnati Bell ended the first quarter with cash and cash equivalents of $90.1 million, substantially up from $17.1 million in the year-ago quarter. Net debt decreased slightly to $2.431 billion from $2.436 billion in the prior quarter.
The company generated free cash flow of $10.5 million in the reported quarter compared with $30.9 million in the year-ago quarter.
Guidance
For fiscal 2011, Cincinnati Bell reiterated its revenue and free cash flow guidance of approximately $1.4 billion and $5 million, respectively. The company raised its adjusted EBITDA guidance to $545 million from $530 million.
New CFO
Concurrent with earnings release, management announced the appointment of Kurt A. Freyberger as a new CFO. Freyberger will replace Gary J. Wojtaszek, who has resigned from the post. The CFO change will be effective August 5.
Our Analysis
Cincinnati Bell remains committed to expanding its data center business and Fioptics platform going forward. We believe the company is poised to benefit from the recent launch of 4G and IPTV platforms in the second half of the year. Further, increased smartphone adoptions coupled with 3G services continue to boost data revenue per user.
However, we remain concerned about Cincinnati Bell’s ongoing expansion into new markets and persistent erosion in local access lines. Moreover, substantial investments made by the company to keep pace with updated technologies of Tier 1 companies such as AT&T Inc. (T) and Verizon Communications (VZ) as well as cable operators such as Time Warner Cable Inc. (TWC) may limit the upside potential of the stock.
We are currently maintaining a long-term Neutral rating on Cincinnati Bell. The stock retains a Zacks #3 (Hold) Rank for the short term.
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