Cincinnati Bell Falls a Penny Short

Revenues grew 8.5% year over year to $367.5 million in the reported quarter however was below the Zacks Consensus Estimate of $357 million. The increase in revenue was driven by higher Data Center Colocation as then as IT Services and Hardware earnings, partially offset by declines across Wireline and Wireless segments. Adjusted EBITDA increased 5.8% from the year-ago quarter to $137.2 million and represents the highest first half EBITDA since 2002.

Wireline revenue dipped 1% year over year to $185.2 million. Lower voice revenue was partially offset by higher earnings from entertainment, long-distance and VoIP (Voice over Internet Protocol) and data revenue.

The company lost 3,000 high-speed Internet clients while the reported quarter, bringing the total subscriber base to 257,900.

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 3,000 Fioptics entertainment subscribers to reach 33,300 clients at the end of the second quarter.

Wireless earnings fell 5% year over year to $69.7 million due to lower equipment and service revenue.

The company exited the quarter with 487,300 wireless clients, including post-paid and prepaid clients of 331,400 and 155,900, respectively. This compares unfavorably with 509,800 wireless clients at the end of year-ago quarter. Post-paid and prepaid churn remained flat at 2.2% and 6.3%, respectively. Post-paid average revenue per user was $50.74, up from $48.90 in the previous quarter. Prepaid ARPU declined 6% year over year to $27.71.

IT Services and Hardware earnings climbed 22% year over year to $75.7 million attributable to high demand for hardware. Earnings from Telecom and IT equipment distribution, Managed services and Professional services increased 23%, 22% and 11%, respectively.

For fiscal 2011, Cincinnati Bell reiterated its revenue and free cash flow guidance of roughly $1.4 billion and $5 million, respectively. The company raised its adjusted EBITDA guidance to $545 million from $530 million.

Cincinnati Bell remains committed to expanding its data center business and Fioptics platform going forward. We believe the company is poised to benefit from the recent launch of 4G and IPTV platforms in the second half of the year. Furthermore, increased smartphone adoptions coupled with 3G services continue to boost data revenue per user.

However, we remain concerned about Cincinnati Bell’s ongoing expansion into new markets and persistent erosion in local access lines. In addition, substantial investments made by the company to keep pace with updated technologies of Tier 1 companies just as AT&T Inc. and Verizon Communications as then as cable operators just as Time Warner Cable Inc. may limit the upside potential of the stock.