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Cincinnati Bell Stays Evenly Poised

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We are maintaining our Neutral recommendation on Cincinnati Bell Inc (CBB - Free Report) – a provider of telecommunications and technology services.

We like Cincinnati Bell’s strategy of offering attractively priced service bundles, including customized blends of local phone service, long-distance, broadband Internet access (DSL) and wireless. These will likely put the company ahead of other similar firms. Moreover, Cincinnati Bell’s proactive marketing strategy, along with its well-known brand and reputation for offering high quality service should limit market share losses.

The company, over the last two years, has been generating strong revenue and EBITDA growth. We expect this growth momentum to continue over the next few quarters, driven by strong growth in Data Center Colocation, and IT Services and Hardware businesses. Further, acquisitions like CyrusOne lay strong foundations for the company’s growth going forward.

In the wireline business, Cincinnati Bell’s Fioptics products, which provide entertainment, high-speed Internet and traditional voice via fiber line to the home, are growing well. The company continues to expand availability and penetration of its Fioptics product suite. During the third quarter, the company introduced Fioptics products to about 15,000 homes and businesses, touching 184,000 units in total, or nearly 25% of the Cincinnati market.
On the wireless front, Cincinnati Bell is enjoying strong demand for its 3G smartphone offerings with Android, Blackberry, and Windows operating systems. These are expected to improve subscriber additions in the upcoming quarters. Although this will likely impact margins in the near term due to higher handset subsidy, we believe the increased adoption of smartphones will improve post-paid average revenue per user in the long term.

Nevertheless, Cincinnati Bell failed to perform as per our expectation in the third quarter, with both earnings and revenue falling short of the Zacks Consensus Estimates.

The company continues to experience erosion in local access lines. With Digital Subscriber Line (DSL) and cable modems gaining widespread acceptance, customers are deactivating the extra phone lines that were used to access the Internet via a dial-up modem. In addition, the shift toward wireless services and the aggressive rollout of VoIP and long distance services by competitors such as AT&T (T - Free Report) and Verizon (VZ - Free Report) in Cincinnati and Dayton have further aggravated access line loss.

Elevated maintenance expenditure, increased promotion and marketing expenses, saturation in the wireless segment and high debt levels also pose major headwinds for the company.

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