Telecom services provider Cincinnati Bell Inc. ( CBB - Analyst Report ) has reported third quarter adjusted earnings of 7 cents per share, at par with the Zacks Consensus Estimate and above 6 cents earned in the year-ago earnings.

Revenue grew 5% year over year to $369 million in the reported quarter and was above the Zacks Consensus Estimate of $361 million. The strong performance was driven by growth in Data Center Colocation as well as IT Services and Hardware revenues. This represents the highest quarterly revenue since 2003.

Adjusted EBITDA fell to $133 million from $135 million in the year-ago quarter.

Segment Results

Wireline revenue dipped 1% year over year to $182.7 million. Lower voice revenue (down 10%) was partially compensated by higher revenues from entertainment (up 49%), long-distance and VoIP (up 4%) and data revenue (up 3%).

Total local access lines declined 7.5% year over year to 635,300, and comprised 564,800 in-territory lines and 70,500 out-of-territory lines.

The company added 8,000 high-speed Internet customers (including Fioptics and DSL) during the reported quarter, bringing the total subscriber base to 258,700 (including DSL broadband subscribers of 221,400).

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 4,000 Fioptics entertainment subscribers to reach 38,000 customers at the end of the third quarter.

Wireless revenues fell 6% year over year to $68.1 million due to lower service revenue (down 7%) partially compensated by higher equipment revenue (up 2%).

The company exited the quarter with 471,800 wireless customers, including 322,200 and 331,400 post-paid and prepaid customers, respectively. This compares unfavorably with 501,100 wireless customers at the end of year-ago quarter. Post-paid churn improved to 2.1% in the third quarter from 2.3% in the year-ago quarter while prepaid churn deteriorated to 7.3% from 6.3%. Post-paid average revenue per user (ARPU) was $50.36 and prepaid ARPU was $28.48.

Revenues from Data Center Colocation climbed 18% year over year to $47.1 million aided by the acquisition of CyrusOne.

Data center utilization remained high at 86% on 736,000 square feet of data center space in the third quarter as opposed to 87% on 621,000 square feet in the year-ago quarter.

IT Services and Hardware revenues rose 26% year over year to $78.9 million attributable to solid demand for hardware. Revenues from Telecom and IT equipment distribution, Managed services and Professional services increased 29%, 17% and 27%, respectively.

Liquidity

Cincinnati Bell ended the third quarter with cash and cash equivalents of $90.7 million, substantially up from $34.2 million in the year-ago quarter. Net debt increased slightly to $2.432 billion from $2.431 billion in the prior quarter.

The company generated free cash flow of $5 million in the reported quarter compared with $33.4 million in the year-ago quarter.

The company repurchased 3.2 million shares for $10 million during the reported quarter.

Guidance

For fiscal 2011, Cincinnati Bell reiterated its revenue, adjusted EBITDA and free cash flow guidance of approximately $1.4 billion, $545 million and $5 million, respectively.

Our Analysis

Cincinnati Bell has strong long-term prospects driven by its 3G and 4G wireless services plus handset offerings. We believe recent acquisitions, expansion of data center business and Fioptics products, and increased smartphone adoption are catalysts for the company’s future growth.

On the other side, the company’s debt exposure may affect its ongoing wireless and broadband expansion efforts and build-outs of additional data center space. Additionally, Cincinnati Bell continues to experience erosion in local access lines as Tier-1 competitors such as AT&T Inc. ( T - Analyst Report ) and Verizon Communications ( VZ - Analyst Report ) shifted their technologies to wireless services.

We are currently maintaining a long-term Neutral rating on Cincinnati Bell. The stock retains a Zacks #3 (Hold) Rank for the short term.