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Telecom services provider Cincinnati Bell Inc.’s (CBB - Analyst Report) first quarter 2012 adjusted earnings of 6 cents per share came in line with the Zacks Consensus Estimate. Adjusted earnings fell 2 cents from the year-ago quarter.

Revenue inched up 1% year over year to $362.8 million but was below the Zacks Consensus Estimate of $365 million. The year-over-year improvement was driven by growth in Data Center Colocation and IT Services and Hardware. The rest of the segment recorded declines in revenues.

Adjusted EBITDA grew 5.2% year over year to $138.8 million in the reported quarter.

Segment Results

Wireline revenue dipped 1% year over year to $182.4 million. Lower voice revenue (down 10%) was partially compensated by higher revenues from entertainment (up 33%), data (up 7%) and long-distance and VoIP revenues (up 4%).  

Total local access lines declined 8.3% year over year to 608,600 at the end of the reported quarter, and comprised 541,600 in-territory lines and 67,000 out-of-territory lines.

The company lost about 1,000 high-speed Internet customers (including Fioptics and DSL) during the reported quarter, bringing the total subscriber base to 257,200 (including 214,400 DSL broadband subscribers).

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 3,100 Fioptics entertainment subscribers to reach 47,700 customers at the end of the first quarter.

Wireless revenues declined 11% year over year to $63.7 million due to lower equipment (down 27%) and service (down 9%) revenues.

The company exited the first quarter with 446,000 wireless customers, including 297,700 and 148,700 post-paid and prepaid customers, respectively. This compares unfavorably with 504,000 wireless customers in the year-ago quarter and 459,000 in the last quarter. Post-paid churn deteriorated slightly to 2.2% from 2.1% in the year-ago quarter and prepaid churn also deteriorated to 6.4% from 5.5%. Post-paid average revenue per user (ARPU) was $50.82 and prepaid ARPU was $28.53 in the first quarter.

Revenues from Data Center Colocation climbed 21% year over year to $52.6 million aided by the acquisition of CyrusOne.

Data center utilization was 85% on 806,000 square feet of data center space in the reported quarter as opposed to 90% on 659,000 square feet in the year-ago quarter.

IT Services and Hardware revenues grew 4% year over year to $73.2 million. Revenues from Managed and Professional services increased 26% while Telecom and IT equipment distribution revenues decreased 6%.

Liquidity

Cincinnati Bell ended first quarter with cash and cash equivalents of $6.9 million. This was drastically down from $84 million in the year-ago quarter. Net debt increased to $2.52 billion from $2.46 billion in the last quarter.

The company incurred negative free cash flow of $62.5 million compared with $10.8 million in the year-ago quarter.

Guidance

For fiscal 2012, Cincinnati Bell expects revenue and adjusted EBITDA of approximately $1.5 billion and $530 million, respectively.

Our Take

We believe Cincinnati Bell remains committed towards expanding its data center business and Fioptics products that are considered key catalysts for the company’s growth. In addition, increased smartphone adoption as well as 3G and 4G services continue to boost data revenue per user.

However, we remain concerned about Cincinnati Bell’s ongoing expansion into new markets and substantial investments undertaken to keep pace with updated technologies of Tier 1 companies such as AT&T Inc. (T - Analyst Report) and Verizon Communications (VZ - Analyst Report).

Although persistent erosion in local access lines will limit the upside potential of the stock, we expect an improvement in the long run.

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

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