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Telecom services provider Cincinnati Bell Inc. (CBB - Analyst Report) reported fourth-quarter 2012 adjusted loss of one cent per share, missing the Zacks Consensus Estimate of 4 cents earning per share. The results also deteriorated from the year-ago earnings of 3 cents.

In 2012, adjusted earnings per share came at 11 cents, down from 24 cents in 2011.

Revenue rose 3.0% year over year to $374.7 million, surpassing the Zacks Consensus Estimate of $368 million. Revenues for the year inched up 1% year over year to $1,473.9 million.       

Adjusted EBITDA decreased 1.5% year over year to $129.9 million in the reported quarter. EBITDA margin was 35%, down 100 basis points year over year.

In 2012, adjusted EBITDA was $534.6 million, down 1.9% year over year.  EBITDA margin stood at 36%, down 100 basis points year over year.     

Segment Results

Wireline revenue inched up 1.0% year over year to $182.1 million driven by a respective 36%, 13% and 4.0% growth in entertainment, other and wireline data revenues. The growth was partially offset by 7% and 1% declines respectively in voice and long distance and VoIP revenues.

Total local access lines declined 7.8% year over year to 573,900 at the end of the reported quarter and comprised 511,000 in-territory lines and 62,900 out-of-territory lines.

The company lost about 700 high-speed Internet customers (including Fioptics and DSL) during the reported quarter, bringing its total subscriber base to 259,400 (including 202,600 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. Fioptics entertainment subscribers reached 55,100 customers at the end of the fourth quarter from 39,600 in the year-ago quarter.

Wireless revenues declined 17.0% year over year to $56.58 million due to lower equipment (down 50%) and service (down 13%) revenues.

The company exited the fourth quarter with 397,800 wireless customers, including 251,300 and 146,500 post-paid and prepaid customers, respectively. This compares unfavorably with 459,000 wireless customers in the year-ago quarter and 415,600 in the last quarter.

Revenues from Data Center co-location climbed 18% year over year to $58.0 million. Data center utilization was 78% on 932,000 square feet of data center space in the reported quarter as opposed to 88% on 763,000 square feet in the year-ago quarter.

IT Services and Hardware revenues grew 15% year over year to $87.0 million. Revenues from Managed and Professional services increased 6% while Telecom and IT equipment distribution revenues grew 19%.

Liquidity

Cincinnati Bell ended the fourth quarter with cash and cash equivalents of $23.6 million, drastically down from $73.7 million in the year-ago quarter. Net debt increased to $2.67 billion from $2.46 billion at the end of 2011.

The company incurred free cash flow of ($154.1) million in 2012 compared with $10.5 million at the end of the previous year.

Outlook

For fiscal 2013, Cincinnati Bell expects revenue and adjusted EBITDA of approximately $1.2 billion and $390 million, respectively.

The company expects to increase its capital investment on fiber deployment to consumers and businesses in Cincinnati that will boost the Wireline business in 2014.

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.

Cincinnati Bell has a Zacks Rank #3 (Hold) rating.

Other Stocks

Deutsche Telekom AG (DTEGY), which has a Zacks Rank #2 (Buy), is another stock we believe is worth considering in this sector.

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