We are maintaining our Neutral recommendation on
Cincinnati Bell Inc
) - a provider of telecommunications and technology services.
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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
) in Cincinnati and Dayton have further aggravated access line
Elevated maintenance expenditure, increased promotion and
marketing expenses, saturation in the wireless segment and high
debt levels also pose major headwinds for the company.