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Cincinnati Bell (CBB)

F.A.S.T Rank: #37 of 1,002 (+28)

Business Description:

Cincinnati Bell operates in a 25-mile radius of Cincinnati, Ohio, providing wireline(voice, data and entertainment), wireless, information technology and telephonyequipment. It spun off its data center business in Jan. 2013 and is actively marketingits wireless segment.

Revenue Multifactor: A

Cincinnati Bell shows no revenue red flags. Days sales outstanding have dropped sixand four days from highs.

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Days Sales Outstanding

(DSO) 44 42 48 48 48 44

% Chng QoQ 4% -14% 1% -1% 9% -1%

% Chng YoY -10% -6% 8% 9% 8% 6%

4 qtr average (DSO) 45 47 47 46 45 44

Additionally, accounts receivable as a percentage of revenue are also down fromhighs, a positive trend after four quarters of year-over-year increases.

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Accounts Receivable as % of

Revenues 48% 46% 53% 53% 53% 49%

% Chng QoQ 4% -14% 1% -1% 9% -1%

% Chng YoY -10% -6% 8% 9% 8% 6%

4 qtr average (DSO) 45 47 47 46 45 44

Revenues dropped from 4% to 15% both quarterly and year-over-year for the lasttwo quarters, but this was due to the spinoff of its data center business, CyrusOne(Nasdaq: CONE), not to the parents remaining business. Overall company revenues

ex CyrusOne are flat. Declines in the wireless segment are balanced by gains in thecompanys new fiber optic initiativeto provide packages of entertainment, voice anddata, similar to those offered by competitors such as Time Warner and Verizon.

Cash Flow Multifactor: B


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Before the CyrusOne spinoff, Cincinnati Bells operating cash flow was heavily

weighted toward the fourth quarter, when CyrusOne customers would renew for ayear. With the spinoff, this seasonality is gone and cash flows smoother.

The most recent quarter shows a fall-off in operating cash flow and operating cash

flow minus net income, primarily due to one-time charges.

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OCF - Net Income -$13.70 $79.00 $67.50 $59.20 $63.80 $11.00

% Chng QoQ -117% 17% 14% -7% 480% -91%

% Chng YoY -121% 618% -45% -6% 62% -71%

The companys cash conversion cycle turned solidly negative five quarters ago aftermostly positive for the prior five, a consistent trend of customer financing:

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Cash Conversion Cycle -2 -9 -3 -8 -2 9

% Chng QoQ -78% 181% -59% 247% -125% 16%

% Chng YoY -11% -201% -73% -266% -176% -13%

4 quarter average -6 -6 -1 -3 0 1

% Chng -1% 406% 67% 2157% -1197% -104%

Earnings Quality Multifactor: B

In addition to the earnings quality positives of stable days sales outstanding,negative working capital and a negative cash conversion cycle, Cincinnati Bell isimproving its debt levels to bring down its leverage to that of its peers. In a firststep, it announced on Aug. 9, 2013 that it would seek a new $400 million termfacility to partially repay its $500 million in 8.25% 2017 senior notes. Successfulcompletion of this refinance would improve debt coverage, interest payments, andcash flows.

The company reduced its long-term debt from Dec. 2012 to June 30, 2013 by 19% Ithe CyrusOne transaction. Its nearest senior debt maturity is 2017. It securitizes its

receivables which have been collected at a consistent rate. There appear to be noconcerns related to debt payments, and the availability of cash from sellingCyrusOne shares beginning in Jan. 2014 provides a margin of safety.

Expectations Multifactor: A

Analysts expect little to nothing from Cincinnati Bell. Shares dropped 22% from$4.15 to $3.23 on Feb. 27, 2013, when the company reported and did not announce


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resumption of a dividend or share repurchases. Downgrades followed. Routinescreening fails to show that low expectations are likely to be surprised in the futurewhen Cincinnati Bells Jan. 14, 2014 lock up expires and it will begin to sell its 69%

ownership of CyrusOne, improving all financial statements. Also, the main drag onrevenues is the wireless division which is actively for sale.

Valuation Multifactor: B

Cincinnati Bells valuation is somewhat lower than its peers at 4.1 times price toLTM operating cash flow and about average for its peers at 6.4 times EV/EBITDA.However, the trend in debt and interest payment improvement, if continued, ispositive for the valuations.

Shareholder Yield Multifactor: F

Cincinnati Bells low grade comes because it neither pays a dividend nor buys back

shares. It appears prohibited from doing so because it currently exceeds theconsolidated total debt leverage ratio of its most restrictive debt covenant.Counterbalancing these factors are that the funds available to Cincinnati Bell when itbegins selling CyrusOne shares after Jan. 14, 2014 would likely bring the companywithin the required range.

Moreover, the company is committed to returning excess cash to shareholders. Thenew CEO from General Electric has stated that if the investment in the companysfiber optic offerings does not achieve the internal hurdle rate, those cash flows willbe returned to shareholders. Capital expenditures are primarily for the fiber opticservices initiative and any reduction in growth capex would favorably affect

available cash. The CEO has also stated that proceeds from CyrusOne share sales andsale of the wireless segment would be earmarked for debt pay downs that reduceinterest payments and create more available cash.

Cincinnati Bell therefore has a strong likelihood of strength in this multifactorbeginning after the Jan. 14, 2014 expiration of the lockup on its CyrusOne shares.

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