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Telecom services provider, Cincinnati Bell Inc. (CBB - Analyst Report) reported first-quarter 2013 adjusted earnings of one cent per share, better than the Zacks Consensus Estimate of a loss of 3 cents per share. The results deteriorated from the year-ago earnings of 6 cents.

Revenues declined 10% year over year to $325.7 million but surpassed the Zacks Consensus Estimate of $314.0 million.

Adjusted EBITDA decreased 15% year over year to $118.1 million in the reported quarter. EBITDA margin was 36%, down 200 basis points year over year.

Segment Results

On Jan 24, 2013, Cincinnati Bell separated the Data Center Colocation segment through an initial public offering of CyrusOne Inc. The company’s first-quarter result reflects the operations of Data Center Colocation up to the aforesaid date.

Wireline revenues fell 1% year over year to $179.7 million due to a drop of 16%, 10% and 7% in Other, Voice and Long distance revenues, respectively. This was partially offset by 56% and 3% growth in Data and Entertainment revenues, respectively.

Total local access lines declined 8% year over year to 561,400 at the end of the reported quarter and comprised 500,800 in-territory lines and 60,600 out-of-territory lines.

Total high-speed Internet customers for the period were 260,200 (including 199,500 DSL broadband subscribers and 60,700 Fioptics users), up 1% year over year.

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 57,600 customers at the end of the first quarter from 42,700 in the year-ago quarter.

Wireless revenues declined 16% year over year to $53.3 million due to lower service (down 7%) revenues.

The company exited the first quarter with 385,300 wireless customers, including 236,600 post-paid (down 20.5% year over year) and 148,700 prepaid customers (unchanged from prior-year quarter).

IT Services and Hardware revenues climbed 15% year over year to $84.5 million. While revenues from Managed and Professional services remained flat, Telecom and IT equipment distribution revenues grew 25%.

Data Center co-location revenues were $15.6 million.

Liquidity

Cincinnati Bell ended the first quarter with a net debt of $2.13 billion compared with $2.67 billion at the end of 2012. The company incurred capital expenditure of $50.9 million in the quarter.

Outlook

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

Our Take

We believe that Cincinnati Bell enjoys a comfortable market position, owing to its distinguished brand name, attractively priced service bundles as well as proactive marketing and expansion strategies. Taking up new projects and the spin-off of CyrusOne into a separate entity are expected to work in favor of the company in the long run and aid earnings growth in the years ahead.

However, persistent erosion in the 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.

Cincinnati Bell – which plans to launch the high-definition Sony Xperia ZL smartphone from Sony Corporation (SNE - Snapshot Report) – holds a Zacks Rank #3 (Hold).

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