Investors Hang Up on Cincinnati Bell

An earnings miss and flat profits in the face of a market share battle with cable operators sends the telecom company’s stock down 10%

Cincinnati Bell (CBB), faces a problem. The regional telephone company serving parts of Ohio, Kentucky and Indiana, is battling to expand its wireless, high-speed Internet and business services before cable rivals like Time Warner (TWX) and Comcast (CMCSA) grab market share.

For example, the Cincinnati-based telecom is one of the few companies in its industry that does not require customers to sign contracts for one to two years. It’s also bundling services into packages, expanding its offers for business customers.

Thus far, the results aren’t showing up in profits. Excluding the sale of the company's remaining interest in its legacy broadband business, Cincinnati Bell's net income was $21 million, matching income in the same period a year ago. Including one-time items, the company’s net income amounted to $23 million, up 81%. The company earned 7 cents per share, while the mean analyst estimate had been for 8 cents per share, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial.

Investors sold off the stock 9.9% on the news, with shares settling at $4.44 on the New York Stock Exchange.

The Cincinnati company's revenue rose 8% year over year to $329 million, helped by margin gains in its wireless business. "We are well-positioned with strong cash flow, a solid balance sheet and operations that are primed for growth and success in 2007," CEO Jack Cassidy said in a press release Feb. 20. The company says its revenue this year will be about the same as in 2006 -- $1.3 billion. But adjusted earnings before interest, taxes, depreciation and amortization will rise to around $465 million from $458 million.

Cincinnati Bell is up against tough competition for customers. For example, Time Warner has been offering bundled digital phone, cable and broadband Internet services to people in Cincinnati in recent years. Meanwhile Insight Communication, which offers cable service in some of Cincinnati Bell's Kentucky markets, is planning to launch telephony service in 2007.

"While we expect CBB to benefit from improving wireless trends, local communications operations continue to be pressured by access line competition," Standard & Poor's Corp. analyst Ari Bensinger said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) "We believe growth and cost reductions will be restricted by limited customer loyalty and a relatively high debt load."