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Telecom services provider Cincinnati Bell Inc. (CBB - Analyst Report) reported third-quarter 2012 adjusted earnings of one cent per share, missing the Zacks Consensus Estimate of 5 cents by 80.0%. Earnings also declined 4 cents from the year-ago quarter.

Revenue edged down 0.2% year over year to $368.2 million and missed the Zacks Consensus Estimate of $370 million. The underperformance was due to decline in Wireline and Wireless revenue that was partly compensated by growth in Data Center Colocation and IT Services and Hardware segments.

Adjusted EBITDA declined 2.2% year over year to $130 million in the reported quarter.

Segment Results

Wireline revenue dipped 0.2% year over year to $182.3 million. Lower voice (down 9%) and other (down 12%) revenues were partially offset by higher revenues from entertainment (up 36%) and data (up 5%). 

Total local access lines declined 7.8% year over year to 585,800 at the end of the reported quarter and comprised 521,800 in-territory lines and 64,000 out-of-territory lines.

The company added about 2,500 high-speed Internet customers (including Fioptics and DSL) during the reported quarter, bringing its total subscriber base to 260,000 (including 207,800 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 4,700 Fioptics entertainment subscribers to reach 51,100 customers at the end of the third quarter.

Wireless revenues declined 3.7% year over year to $59.5 million due to lower equipment (down 22%) and service (down 12%) revenues.

The company exited the third quarter with 415,600 wireless customers, including 270,700 and 144,900 post-paid and prepaid customers, respectively. This compares unfavorably with 471,800 wireless customers in the year-ago quarter and 430,100 in the last quarter.

Revenues from Data Center Colocation climbed 5% year over year to $56.7 million. Data center utilization was 78% on 896,000 square feet of data center space in the reported quarter as opposed to 86% on 736,000 square feet in the year-ago quarter.

Cincinnati Bell received a favorable verdict on its private letter ruling requests with the Internal Revenue Service regarding CyrusOne’s qualification as a real estate investment trust.

IT Services and Hardware revenues grew 1.3% year over year to $78.3 million. Revenues from Managed and Professional services increased 5% while Telecom and IT equipment distribution revenues nudged down 1%.

Liquidity

Cincinnati Bell ended the third quarter with cash and cash equivalents of $7.7 million, drastically down from $90.7 million at the end of the year-ago quarter. Net debt increased to $2.57 billion from $2.55 billion at the end of the last quarter.

The company incurred a negative free cash flow of $17.0 million compared with a positive $5 million at the end of the previous year quarter.

Outlook

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

Cincinnati Bell filed with U.S. regulators to spin off its data center business, CyrusOne, through an IPO. The company would use the proceeds to pay off CyrusOne's debt. Other details of the spin-off plans have not been disclosed.

Our Take

The company is expected to benefit from its expanding data center business and Fioptics products that are considered key catalysts for the company’s growth in the long term. However, persistent erosion in local access lines 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 Inc. (VZ - Analyst Report) – will limit the upside potential of the stock in the short term.

We currently maintain a long-term Neutral recommendation on Cincinnati Bell Inc. However, it holds a Zacks #4 Rank, implying a short-term Sell rating.

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