Colocation Revenues Up 18% and Pointed Higher
Cincinnati Bell (Nasdaq:CBB) shrugged off steep declines in access lines and a drop in wireless subs in 3Q11, to turn in a solid quarter overall. Its revenue increased $17m YoY in 3Q11, or 5%, to $369m and its operating income rose 4% YoY and 11% QoQ to $86.3m. Cincinnati Bell’s bottom line also improved 20% YoY to $17.6m in the quarter. The key drivers for its success in 3Q11: data centers and IT services.
The company increased its stake in the data centers last June when it purchased CyrusOne for $525m, adding 174k square feet of data center capacity. At the time Jack Cassidy, president and ceo of Cincinnati commented that the deal “an important step in our long-term strategy of becoming the preferred global data center colocation provider to Fortune 1000 companies.” That strategy appears to be paying off, as its data center colocation revenue in 3Q11 was up 18% YoY from its 3Q10 levels to $47m, with a full quarter of CyrusOne operations in both periods.
The trend in Cincinnati Bell’s capex margins over the past five quarters reflects the success of its data center investments. Capital spending rose steadily from $43m in 3Q10 to $74.5 in 3Q11, $41m of which was spent on data centers. Capex margins meanwhile have jumped 75% from 12.2% to 20.2% YoY in 3Q11. As Cincinnati Bell gets more bang for its buck in data colocation, it looks to invest more in the business. It added 67k square feet of storage space in the 3Q11, and plans to add another 30k square feet in 4Q11.
The company also enjoyed growth in its IT services and hardware segment as increased business spending drove hardware revenues up $12.2m in 3Q11, while revenue from managed services such as web hosting and data backup rose $2.4m or 17% YoY.
While business-centric services fueled a majority of Cincinnati Bell’s gains, its fiber-based consumer services—branded “Fioptics”—have shown promise as well. It added 13k television subs and 14k Internet subs in the past year—51% and 58% growth—and increased its Fioptics ARPU from $114 to $122 YoY in 3Q11. Fioptics connections however still represent a small percentage of Cincinnati Bell’s overall connections mix. DSL customers outnumber its 38k fiber Internet customers 6 to 1, and despite beginning its Fioptics rollout in 2008, its expansion efforts have been slow.
This deliberate pace however sped up in 3Q11 as capital expenditures for Fioptics jumped 25% YoY to $12.5m. Cincinnati Bell expanded its fiber footprint to include another 25k houses in the quarter, increasing its homes passed to 115k, after building fiber to only 30k homes in all of 2010. A main reason for speeding up its build: strong demand. Fioptics’ penetration of homes passed is 29% in areas in which service has been offered for at least a year. By contrast, AT&T’s has achieved only 25% penetration of U-verse in the service areas in which it has marketed service for three years.
Despite a solid quarter overall, 3Q11 was not without its disappointments for Cincinnati Bell. Access lines tumbled 7.8% YoY to 635k in 3Q11, and it lost 27k postpaid wireless subs, or 8% of its postpaid customer base, driving wireless revenues down $5m YoY. The telco has cannibalized a portion of its own access lines, offering customers VoIP services as part of its revenue replacement strategy, while management attributed its wireless sub losses to stronger competition from national carriers.