Cincinnati Bell Misses by a Penny

| About: Cincinnati Bell (CBB)

Regional US telecom carrier Cincinnati Bell (NYSE:CBB) announced fourth quarter results with adjusted earnings per share (EPS) of 10 cents, falling a penny shy of the Zacks Consensus Estimate of 11 cents. The result was flat year-over-year. For full year 2009, adjusted EPS was 42 cents, missing the Zacks Consensus Estimate of 44 cents.

Adjusted EPS excludes special items such as restructuring charges associated with workforce reduction and loss on extinguishment of debt. Reported net income applicable to common shareholders for the quarter plunged 88% year-over-year to $4.2 million (or 2 cents a share). For full year 2009, net income fell 14% year-over-year to $79.2 million (or 37 cents a share).

Revenues fell 3% from the prior-year quarter to $345.2 million as a result of the declines across the wireline and wireless segments, but were above the Zacks Consensus Estimate of $338 million. Revenues for full year 2009 came in at $1.34 billion, down 5% year-over-year, mostly in line with the Zacks Consensus Estimate. Adjusted EBITDA of $120 million for the quarter represents a 1% year-over-year decrease.

Results by Segments

Wireline: The company reported wireline revenues of $193 million, down 3% from the year-ago quarter. Lower voice revenues (down 12% year-over-year to $82 million) were partially offset by an increase in revenues from data services (up 2% to $70 million) and long-distance and VoIP (up 2% to $25 million).

At the end of 2009, total local access lines reached 723,500 (down 7% year-over-year), including 650,200 in-territory lines and 73,300 out-of-territory lines. Growth in residential and business access lines in the expansion markets continue to partially offset losses in traditional consumer access lines.

The company reported a total of 233,800 DSL broadband subscribers, representing a 0.3% annualized growth. Cincinnati Bell’s wireline results now include its Fioptics services that use fiber-to-the-home network to offer entertainment, voice and broadband Internet services. The company ended 2009 with 11,000 Fioptics entertainment subscribers and 10,000 Fioptics broadband customers.

Cincinnati Bell remains challenged by the aggressive roll-out of Voice-over-Internet Protocol (VoIP) and long-distance services by Tier-1 carriers such as AT&T (NYSE:T) and Verizon (NYSE:VZ) in Cincinnati and Dayton and local phone services offered by cable TV operators such as Time Warner Cable (TWC).

Wireless: Revenues from the wireless segment reached $77 million, down 3% from the prior-year quarter. Wireless service revenues declined 2% year-over-year to $70 million while equipment revenues decreased 3% to $6 million. Growth in data revenues driven by increased smartphone adoption was more than offset by lower voice revenues.

Approximately 19,000 new smartphone activations were registered in the quarter, a sequential improvement, bringing the total smartphone subscriber base to 83,000. Increased market adoption of these devices has been a primary catalyst behind the 24% year-over-year growth in data ARPU (average revenue per user), resulting in year-over-year improvement in postpaid ARPU.

Cincinnati Bell strengthened its smartphone range with the launch of Research In Motion’s (RIMM) BlackBerry 9700 smartphone in January 2010. This represents the company’s first 3G BlackBerry offering. To improve liquidity and enhance shareholder value, the company sold 196 wireless communications towers to American Tower (NYSE:AMT) in late 2009 for $100 million.

The company reported a total of 533,100 wireless customers (down 3% year-over-year) at the end of 2009, including total postpaid and prepaid wireless customers of 379,100 and 154,000, respectively.

Technology Solutions: Revenues for this segment registered $85 million, down 4% year-over-year. Telecom and IT equipment revenues decreased 11% year over year to $52 million, partly offset by a 9% growth in data center and managed services revenues that reached $28 million. Utilization rate of the company’s data center capacity decreased to 79% in the quarter from 88% reported a year ago.


Cincinnati Bell released its guidance for 2010 with projected revenues of $1.3 billion. The company expects adjusted EBITDA of approximately $460 million (versus $470 million in 2009) and free cash flow of roughly $130 million (versus $164 million in 2009). Cincinnati Bell will remain committed to expand its data center operation in 2010. The current Zacks Consensus Estimate for 2010 revenue and EPS are $1.33 billion and 43 cents, respectively.

We believe Cincinnati Bell has stable long-term prospects driven by its 3G wireless service coupled with premium handset offerings that are expected to drive data revenue growth and restrict churn (customer switch) in the future reporting periods.

However, we remain concerned about the high debt level (roughly $1.98 billion) and limited liquidity, which may affect future capital spending on network infrastructure deployments and data center expansion. Our Neutral recommendation on the stock reflects these assessments.