Edgar Filing: CINCINNATI BELL INC

CBB-12.31.11-10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K



x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-8519

CINCINNATI BELL INC.



Ohio		31-1056105
(State of Incorporation)		(I.R.S. Employer Identification No.)

221 East Fourth Street, Cincinnati, Ohio 45202

(Address of principal executive offices) (Zip Code)

(513) 397-9900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class			Name of each exchange on which registered
Common Shares (par value $0.01 per share)			New York Stock Exchange
6 ³/₄% Convertible Preferred Shares			New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and

will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	o

Non-accelerated filer	o	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the voting common shares owned by non-affiliates of the registrant was $0.6 billion, computed by reference to the closing sale price of the common stock on the New York Stock Exchange on June 30, 2011, the last trading day of the registrant’s most recently completed second fiscal quarter. The Company has no non-voting common shares.

At January 31, 2012, there were 196,589,670 common shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement relating to the Company’s 2012 Annual Meeting of Shareholders are incorporated by reference into Part III of this report to the extent described herein.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

TABLE OF CONTENTS



	PART I
		Page
Item 1.	Business	4

Item 1A.	Risk Factors	13

Item 1B.	Unresolved Staff Comments	22

Item 2.	Properties	23

Item 3.	Legal Proceedings	24

Item 4.	Mine Safety Disclosures - not applicable

	PART II
Item 5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25

Item 6.	Selected Financial Data	27

Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28

Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	62

Item 8.	Financial Statements and Supplementary Data	63

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	119

Item 9A.	Controls and Procedures	119

Item 9B.	Other Information	119

	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	120

Item 11.	Executive Compensation	121

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	121

Item 13.	Certain Relationships and Related Transactions, and Director Independence	121

Item 14.	Principal Accountant Fees and Services	121

	PART IV
Item 15.	Exhibits and Financial Statement Schedules	122

	Signatures	127

This report contains trademarks, service marks and registered marks of Cincinnati Bell Inc., as indicated.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

Part I

Item 1. Business

General

Cincinnati Bell Inc. and its consolidated subsidiaries (the "Company" or "we") is a full-service regional provider of data and voice communications services over wireline and wireless networks, a full-service international provider of data center colocation and related managed services, and a reseller of information technology ("IT") and telephony equipment. The Company provides telecommunications service to businesses and consumers in the Greater Cincinnati and Dayton, Ohio areas primarily on its owned wireline and wireless networks with a well-regarded brand name and reputation for service. The Company also provides business customers with outsourced data center colocation operations in world-class, state-of-the-art data center facilities, located in the Midwest, Texas, England and Singapore. In connection with the data center colocation operations in the Midwest, the Company also provides business customers with a full range of managed IT solutions.

The Company operates in four segments: Wireline, Wireless, Data Center Colocation, and IT Services and Hardware.

The Company is an Ohio corporation, incorporated under the laws of Ohio in 1983. Its principal executive offices are at 221 East Fourth Street, Cincinnati, Ohio 45202 (telephone number (513) 397-9900 and website address

http://www.cincinnatibell.com). The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC") under the Exchange Act. These reports and other information filed by the Company may be read and copied at the Public Reference Room of the SEC, 100 F Street N.E., Washington, D.C. 20549. Information about the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy statements, and other information about issuers, like the Company, which file electronically with the SEC. The address of that site is http://www.sec.gov. The Company makes available its reports on Form 10-K, 10-Q, and 8-K (as well as all amendments to these reports), proxy statements and other information, free of charge, at the Investor Relations section of its website.

Wireline

The Wireline segment provides local voice, data, long distance, entertainment, voice over internet protocol ("VoIP"), and other services over its owned and other wireline networks. Local voice services include local telephone service, switched access, and value-added services such as caller identification, voicemail, call waiting, and call return. Data services include high-speed internet using digital subscriber line ("DSL") technology and over fiber using its gigabit passive optical network ("GPON"). Data services also provide data transport for businesses, including local area network ("LAN") services, dedicated network access, and metro ethernet and dense wavelength division multiplexing ("DWDM")/optical wave data transport, which principally are used to transport large amounts of data over private networks. Cincinnati Bell Telephone Company LLC ("CBT"), a subsidiary of the Company, is the incumbent local exchange carrier ("ILEC") for the approximate 25-mile radius around Cincinnati, Ohio which includes parts of northern Kentucky and southeastern Indiana. CBT has operated this ILEC territory for approximately 140 years, and approximately 95% of Wireline voice and data revenue for 2011 was generated within this ILEC territory. Long distance and VoIP services include long distance voice, audio conferencing, VoIP and other broadband services including private line and multi-protocol label switching ("MPLS"), a technology that enables a business customer to privately interconnect voice and data services at its locations. Entertainment services are comprised of television through our Fioptics product suite, which covers about 20% of Greater Cincinnati, and DirecTV® commissioning over the Company’s entire operating area. Other services primarily include inside wire installation for business enterprises, rental revenue, public payphones and clearinghouse services.

The Company has expanded its voice and data services beyond its ILEC territory, particularly in Dayton and Mason, Ohio, through the operations of Cincinnati Bell Extended Territories LLC ("CBET"), a competitive local exchange carrier ("CLEC") subsidiary of CBT. CBET provides voice and data services on either its own network or through purchasing unbundled network elements ("UNE-L" or "loops") from various incumbent local carriers. The ILEC and CLEC territories are linked through a Synchronous Optical Fiber Network ("SONET"), which provides route diversity between the two territories via two separate paths.

Voice services

The Wireline segment provides voice services over a digital circuit switch-based network to end users via access lines. In recent years, the Company’s voice access lines have decreased as its customers have increasingly employed wireless technologies in lieu of wireline voice services ("wireless substitution"), have migrated to competitors, including cable

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

companies that offer VoIP solutions, or have been disconnected due to credit problems. The Wireline segment had 621,300 voice access lines in service on December 31, 2011, which is a 7.8% and 14.1% reduction in comparison to 674,100 and 723,500 access lines in service at December 31, 2010 and 2009, respectively.

In order to minimize access line losses and to provide greater value to its customers, the Company provides bundled offerings that enable customers to bundle two or more of the Company’s services, such as wireless and a phone line, at a lower price than if the services were purchased individually. The Company believes its ability to provide voice, high-speed internet, wireless, and entertainment services to its customers allows it to compete effectively against national communications companies in Greater Cincinnati, most of which either are not able to provide or have not effectively provided these bundled offerings of products to consumers. The Company has approximately 426,000 residential customers in Greater Cincinnati and Dayton, Ohio, 52% of which bundle two or more Company products and 17% of which bundle three or more Company products.

The Wireline segment has been able to partially offset the effect of access line losses on revenue in recent years by:

(1) increasing high-speed internet penetration, particularly with its Fioptics service;

(2) increasing entertainment revenue with more Fioptics fiber-to-the-home and internet protocol television ("IPTV")

subscribers; and

(3) increasing the sale of audio conferencing and VoIP services.

Data

Data revenue consists of data transport, DSL high-speed internet access, Fioptics high-speed internet access, and LAN interconnection services. The Company’s wireline network includes the use of fiber optic cable, with SONET rings linking Cincinnati’s downtown with other area business centers. These SONET rings offer increased reliability and redundancy to CBT’s major business customers. CBT has an extensive business-oriented data network, offering high-speed and high capacity data transmission services over an interlaced ATM — Gig-E backbone network.

The Company had 218,000, 228,900, and 233,800 DSL high-speed internet subscribers at December 31, 2011, 2010, and 2009, respectively. In addition, the Company also had 39,300, 27,200, and 13,800 Fioptics high-speed internet customers at December 31, 2011, 2010, and 2009, respectively. The Company was able to provide DSL high-speed internet service to 96% of its ILEC territory and its fiber-based Fioptics high-speed internet to about 20% of its ILEC territory as of the end of 2011.

Long distance and VoIP services

The Company provides long distance and VoIP services primarily through its Cincinnati Bell Any Distance Inc. ("CBAD") and eVolve Business Solutions LLC ("eVolve") subsidiaries. These entities provide long distance and audio conferencing services to business and residential customers in the Greater Cincinnati and Dayton, Ohio areas as well as VoIP and other broadband services, including private line and MPLS, within and beyond its traditional territory to business customers. Residential customers can choose from a variety of long distance plans, which include unlimited long distance for a flat fee, purchase of minutes at a per-minute-of-use rate, or a fixed number of minutes for a flat fee. At December 31, 2011, CBAD had approximately 447,400 long distance subscribers, compared to 482,800 and 508,300 long distance subscribers at December 31, 2010 and 2009, respectively. The decrease in long distance subscribers from 2010 was primarily driven by a 9% decline in residential subscribers, consistent with the CBT access line loss.

VoIP services are provided to business customers in the Company’s traditional Greater Cincinnati and Dayton, Ohio operating territory and, to a lesser extent, to businesses outside of this area, primarily in Ohio, Indiana, Illinois, and Kentucky. The Company believes its VoIP operations will expand in Greater Cincinnati and Dayton, Ohio as business customers continue to look for alternatives to traditional ILEC-based operations and as the VoIP technology continues to improve. VoIP access line equivalents totaled 40,700 and 33,400 at December 31, 2011 and 2010, respectively.

Entertainment

The Company’s improvement of its wireline network over the last several years has included capital expenditures for fiber optic cable in limited areas. The large bandwidth of fiber optic cable allows the Company to provide customers with its Fioptics product suite of services, which include entertainment, high-speed internet and voice services, in areas in which fiber optic cable is laid. In 2011, the Company launched its IPTV platform. This technology generally involves fiber facilities to the neighborhood node, and then copper-based facilities for the "last mile" to the consumer household. Because Fioptics IPTV uses the existing cable network, the capital costs are less than half of Fioptics fiber to the home. The Company first focused its fiber network expenditures on high traffic areas, such as apartments and condominium complexes as well as business office

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

parks. As of December 31, 2011, the Company “passes” 134,000 entertainment eligible units and had 39,600 Fioptics entertainment subscribers.

The success of the fiber investment is based in large part on the ability to attract a high percentage of customers that are passed with the fiber very quickly after fiber is made available to particular neighborhoods. The Company’s consumer penetration rate has been more than 30% within twelve months of deploying Fioptics in a particular area.

Fioptics offers the following as of December 31, 2011:


•	350 entertainment channels, including digital music, local, movie, and sports programming, as well as Indian and Spanish-language packages;


•	80 high-definition channels;


•	Parental controls, HD DVR and Video-on-Demand;


•	High-speed internet from 10 mbps to 100 mbps; and


•	Local voice and long distance services.

In addition to providing entertainment through Fioptics to about 20% of Greater Cincinnati, the Company also is an authorized sales agent and offers DirecTV® satellite programming to customers in substantially all of its operating territory through its retail distribution outlets. The Company does not deliver satellite television services. Instead, DirecTV® pays the Company a commission for each subscriber and offers a bundle price discount directly to the Cincinnati Bell customers subscribing to its satellite television service. At December 31, 2011, 2010, and 2009, the Company had 39,300, 36,900, and 30,000 customers, respectively, that were subscribers to DirecTV®.

Other

The Company provides building wiring installation services to businesses in Greater Cincinnati and Dayton, Ohio on a project basis.

CBT’s subsidiary, Cincinnati Bell Telecommunications Services LLC, operates the National Payphone Clearinghouse ("NPC") in an agency function, facilitating payments from inter-exchange carriers to payphone service providers ("PSPs") relating to the compensation due to PSPs for originating access code calls, subscriber 800 calls, and other toll free and qualifying calls pursuant to the rules of the Federal Communications Commission ("FCC") and state regulatory agencies. As the NPC agent, the Company does not take title to any funds to be paid to the PSPs, nor does the Company accept liability for the payments owed to the PSPs.

On August 1, 2011, the Company sold substantially all of the assets associated with its home security monitoring business, Cincinnati Bell Complete Protection Inc. ("CBCP"). CBCP provided surveillance hardware and monitoring services to residential and business customers in the Greater Cincinnati area.

Wireless

Cincinnati Bell Wireless LLC ("CBW") provides advanced digital wireless voice and data communications services through the operation of a Global System for Mobile Communications/General Packet Radio Service ("GSM") network with a 3G Universal Mobile Telecommunications System ("UMTS") and 4G High Speed Packet Access+ ("HSPA+") network overlay, which is able to provide high-speed data services such as streaming video. Wireless services are provided to customers in the Company’s licensed service territory, which includes Greater Cincinnati and Dayton, Ohio, and areas of northern Kentucky and southeastern Indiana. The Company’s customers are also able to place and receive wireless calls nationally and internationally due to roaming agreements that the Company has with other carriers. The Company’s digital wireless network utilizes approximately 460 cell sites in its operating territory. The Company’s digital wireless network also utilizes 50 MHz of licensed wireless spectrum in the Cincinnati Basic Trading Area and 40 MHz of licensed spectrum in the Dayton Basic Trading Area. The Company owns the licenses for the spectrum that it uses in its network operations. As of December 31, 2011 the Wireless segment served approximately 459,000 subscribers, of which 311,000 were postpaid subscribers who are billed monthly in arrears and 148,000 were prepaid i-wireless^SM subscribers who purchase service in advance.

In 2011, the Company began upgrading its network to 4G ("fourth generation") using HSPA+ technologies, which provides for a better user experience when a large quantity of data is passed through the wireless network, such as for streaming video and gaming applications. This upgrade occurs largely through software enhancements and additional fiber optic cable installations.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

The full implementation of this network will likely take several years, and the Company may lag behind certain of the national competitors in construction of the 4G network and the speeds associated with this network.

The Wireless segment competes against all of the national wireless carriers by offering strong network quality, unique rate plans, which may be bundled with the Company’s wireline services, and conveniently located retail outlets. The Company’s unique rate plans and products include a smartphone family plan, an unlimited everyday calling plan to any Cincinnati Bell local voice, wireless or business customer and Fusion WiFi, which utilizes Unlicensed Mobile Access technology for enhanced in-building wireless voice reception and faster rates of data transmission compared to alternative wireless data services. In addition, the Company also offers several family voice service plans, which allows the first subscriber to get a wireless voice service plan at the regular price and then each additional family member can be added at a lower price.

In December 2009, the Company sold 196 wireless towers, which represented substantially all of its owned towers, for $99.9 million in cash. CBW continues to use these towers in its operations under a 20-year lease agreement. Also during 2009, the Company sold almost all of its owned wireless licenses for areas outside of its Cincinnati and Dayton, Ohio operating territories.

Service revenue

A variety of monthly rate plans are available to postpaid subscribers. These plans can include a fixed or unlimited number of national minutes, an unlimited number of Cincinnati Bell mobile-to-mobile minutes (calls to and from the Company’s other Wireless subscribers), an unlimited number of calls to and from a CBT access line, and/or local minutes for a flat monthly rate. For plans with a fixed number of minutes, postpaid subscribers can purchase additional minutes at a per-minute-of-use rate. Postpaid subscribers are billed monthly in arrears.

Prepaid i-wireless^SM subscribers pay in advance for use with pay per minute, pay by day, pay by week, or pay by month rate plans. Weekly and monthly smartphone plans are also available for prepaid i-wireless^SM subscribers. In 2011, CBW began offering prepaid service plans utilizing lifeline subsidies from Ohio and Kentucky, which are discounted versions of our standard prepaid service plans to certain customers who receive government assistance. As of December 31, 2011, CBW had approximately 18,000 lifeline subscribers.

A variety of data plans are also available as bolt-ons to voice rate plans for both postpaid and prepaid subscribers. The Company has focused its efforts for the past several years on increasing its subscribers that use smartphones, which are able to browse the internet and use high-speed data services and high-level operating platforms. These smartphones require that subscribers purchase data plans, and, as a result, the Company’s 2011 data plan revenue per subscriber has increased by 24% for postpaid subscribers compared to 2010. Smartphone prepaid and postpaid subscribers have increased from 105,000 at December 31, 2010 to 125,000 at December 31, 2011, and represent 27% of total subscribers at the end of 2011. Data offerings provided by the Company include text and picture messaging, mobile broadband, multi-media offerings, and location-based services.

Revenue from other wireless service providers for use of the Company’s wireless networks to satisfy the roaming requirements of the carrier’s own subscribers and reciprocal compensation for other carriers’ subscribers who terminate calls on CBW’s network, accounted for less than 1% of total 2011 segment revenue. Prior to the sale of wireless towers in December 2009, Wireless also recognized colocation revenue, which is rent received for the placement of other carriers’ radios on CBW towers.

Equipment revenue

As is typical in the wireless communications industry, CBW sells wireless handset devices at or below cost to entice customers to use its wireless services, for which a recurring monthly fee is charged. The Company is increasingly using equipment contracts for its postpaid subscribers. These contracts require the customer to use the CBW monthly service for a minimum period of two years in exchange for a deeply discounted wireless handset. As of December 31, 2011, 57% of postpaid customers were under contract. Sales take place at Company retail stores, on the Company’s website, via business sales representatives, and in independent distributors’ retail stores pursuant to agency agreements. CBW purchases handsets and accessories from a variety of manufacturers and maintains an inventory to support sales.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

Data Center Colocation

The Data Center Colocation segment provides data center colocation services to businesses worldwide, with a particular focus on serving large global enterprises. This segment supports enterprise clients in many industries, including energy, oil and gas, mining, medical, technology, finance and consumer goods and services. On June 11, 2010, the Company purchased Cyrus Networks, LLC, a data center operator based in Texas, for approximately $526 million, net of cash acquired, which was subsequently merged into its CyrusOne Inc. subsidiary ("CyrusOne"). Services are offered through the Company’s CyrusOne, Cyrus One UK Limited, and GramTel Inc. subsidiaries.

The Company owns or leases 22 properties in Texas, Ohio, Kentucky, Indiana, Michigan, Illinois, Arizona, England and Singapore. As of December 31, 2011, the 20 operating data center facilities had capacity of 763,000 square feet and 673,000 square feet were under contract with customers, resulting in an 88% utilization rate of the available data center space.

Our data centers are top tier facilities, offering best-in-class performance and reliability for high power density and availability. Design architectures in our best facilities support power requirements exceeding 250 kilowatts per square foot and provide optimal redundancy, efficiency, security and reliability. Our power and cooling architectures utilize advanced components and are designed with parallel redundancies. Our data centers provide sufficient available power to run almost any IT hardware product and application, and sufficient cooling capacity to maintain optimal temperature in the data center despite the heat produced by the IT equipment. Redundant power architectures support continuous availability of power to customers' critical information systems and equipment. This redundant power architecture includes separate transformers with separate parallel underground utility feeds, dual power feeds from multiple power distribution units within each enclosure, and multiple generators, fuel tanks and batteries.

The Company's cooling design architecture includes advanced cooling equipment systems each independently dual-powered for redundancy. In addition, chilled water is leveraged at some locations where available. Ambient temperature and humidity are strictly monitored by the network operations center.

To provide flexibility and adaptability for customers, we have adopted a carrier neutral approach to connectivity. Clients are able to select a best-in-class carrier that best fits their unique preference and requirements. Our core architecture supports multiple metropolitan area network carriers for point-to-point and dark fiber connectivity, and provides redundant switching and router configurations. To further provide redundancy, we also provide dual bandwidth connections to each enclosure. CyrusOne often takes a lead role during the client's implementation and move phase, to ensure that clients are established in data centers safely and efficiently.

CyrusOne's on-site services include routine maintenance and performance-related work items conducted on behalf of our clients. Some of our clients prefer to conduct maintenance and mechanical routines themselves, while others rely exclusively on data center professionals to conduct these tasks. These on-site services primarily include tape management and hardware maintenance.

The Company's data centers employ military-grade security protocols to protect all physical assets, such as:


•	On-site security guards 24 hours a day, 365 days a year;


•	Video surveillance and recording of the exterior and interior of each facility;


•	Biometric and key card security for rigid access control;


•	Turn style doors to prevent tail-gating; and


•	Reinforced physical structure including concrete bollards, steel-lined walls, bulletproof glass and barbed wire fencing.

In addition to rigid physical security controls, network operations center professionals maintain around-the-clock visibility of the data center environment through the use of visual inspection, advanced monitoring tools, and strict checklist maintenance regimens.

Customers have several choices for colocating their network service and storage of IT equipment. Customers can place their owned equipment in a shared or private cage or customize their space to meet their unique requirements. Access to cages and suites is strictly controlled per client specifications. Our cabinets feature industry standard 19-inch width parameters, and are arranged on the floor according to computational fluid dynamics efficiency targets to achieve optimal cooling performance. As customers’ colocation requirements increase, they can expand within their original cage or upgrade into a cage that meets their needs. Cabinets and cage space are typically priced with an initial installation fee and an ongoing recurring monthly charge.

All customers sign contracts, which typically range between 3-7 years. Though rare, some contracts are as short as one year,

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

and some are as long as 15 years. The contracts typically define the space and power being provided, pricing for the recurring monthly colocation services, as well as pricing for non-recurring items such as power/data whips installation, smart hands or project managers. Generally, contracts contain service level agreements that require the Company to maintain the data center environment (e.g., temperature, humidity and power service) at specified levels and contain penalties if these levels are not maintained.

Our data centers offer power circuits at various amperages and phases customized to a customer’s power requirements. Power is typically priced with an initial installation fee and an ongoing recurring monthly charge that is fixed as long as the customer stays within the contractual limits for power consumption. In certain cases, large enterprise customers contract for metered power, where the power component of their monthly bill is only for the power consumed by their environment, both to power and cool their infrastructure.

Our goal is to become the preferred global data center provider to the Fortune 1000 and other similarly sized companies, targeting North America, Asia and Europe. The Company intends to continue to pursue additional customers and growth specific to its data center colocation business and is prepared to commit additional resources, including resources for capital expenditures, acquisitions and working capital both within and outside its traditional operating territory, to support this growth.

IT Services and Hardware

IT Services and Hardware provides a full range of managed IT solutions, including managed infrastructure services, IT and telephony equipment sales, and professional IT staffing services. These services and products are provided in multiple geographic areas through the Company’s subsidiaries, Cincinnati Bell Technology Solutions Inc. (“CBTS”), CBTS Canada Inc., CBTS Software LLC and Cincinnati Bell Technology Solutions UK Limited. By offering a full range of equipment and outsourced services in conjunction with the Company’s wireline network services, the IT Services and Hardware segment provides end-to-end IT and telecommunications infrastructure management designed to reduce cost and mitigate risk while optimizing performance for its customers.

Telecom and IT equipment

The Company’s telecom and IT equipment distribution product line is a value-added equipment reseller operation. The Company maintains premium resale relationships with approximately ten branded technology vendors, which allow it to competitively sell and install a wide array of telecommunications and computer equipment to meet the needs of its customers. This unit also manages the maintenance of a large base of local customers with traditional voice systems as well as converged VoIP systems.

Managed services

Managed services include products and services that combine assets, either customer-owned or owned by the Company, with management and monitoring from its network operations center, and skilled technical resources to provide a suite of offerings around voice and data infrastructure management. Service offerings include but are not limited to network management, electronic data storage management, disaster recovery, data security management, and telephony management. These services can be bundled and contracted in several ways, either as separate services around a specific product such as storage backups, or by combining multiple products, services, and assets into a utility or as a service model for enterprise customers.

Professional services

The professional services product line provides staff augmentation and professional IT consulting by highly technical, certified employees. These engagements can be short-term IT implementation and project-based work as well as longer term staffing and permanent placement assignments. The Company utilizes a team of experienced recruiting and hiring personnel to provide its customers a wide range of skilled IT professionals at competitive hourly rates.

Sales and Distribution Channels

The Company’s Wireline and Wireless segments utilize a number of distribution channels to acquire customers. As of December 31, 2011, the Company operated 13 retail stores in its operating territory. The Company works to locate retail stores in high traffic but affordable areas, with a distance between each store that considers optimal returns per store and customer convenience. The Company has begun to limit its retail presence outside the ILEC territory to focus resources on Data Center Colocation and Fioptics opportunities. As stores are added or closed from time to time, certain stores may be transitioned to local agents for marketing of the Company's products and services.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

Wireline and Wireless also utilize a business-to-business sales force and a call center organization to reach business customers in its operating territory. Larger business customers are often supported by sales account representatives, who may go to the customer premises to understand the business needs and recommend solutions that the Company offers. Smaller business customers are supported through a telemarketing sales force and store locations. The Company also offers fully-automated, end-to-end web-based sales of wireless phones, accessories and various other Company services. In addition, the Company utilizes a door-to-door sales force that targets the sale of the Fioptics products to residents.

Aside from Company resources, there are 155 third-party agent locations that sell Wireline and Wireless products and services at their retail locations. The Company supports these agents with discounted prices for wireless handsets and other equipment and commission structures. The Company also sells wireline and wireless capacity on a wholesale basis to independent companies, including competitors that resell these services to end-users.

The Company’s Data Center Colocation and IT Services and Hardware segments primarily sell to customers through its business-to-business sales force. Sales representatives develop customer leads through existing relationships with IT leaders of businesses, referrals from existing customers, and IT hardware vendors. To a lesser extent, leads are also developed from third-party brokers and marketing sources, including web-based efforts.

Suppliers and Product Supply Chain

Wireline’s primary purchases are for network equipment, software, and fiber cable to maintain and support the growth of Fioptics services, as well as copper-based electronics and cable. Wireless primarily purchases handsets and accessories, wireless cell site and network equipment, and software. Wireless often partners with other regional carriers and wholesale distributors to build requisite volume for handset manufacturers. The Company generally subjects these purchases to competitive bids and selects its vendors based on price, service level, delivery, quality of product and terms and conditions.

The Company maintains facilities and operations for storing cable, handsets and other equipment, product distribution and customer fulfillment.

Also, Wireline has long-term commitments to outsource various services, such as certain information technology functions, cash remittance and accounts payable functions, call center operations, and maintenance services. Similar to the purchase of materials, competitive bids are obtained for such vendors and are subject to a rigorous evaluation and approval process.

Data Center Colocation primarily purchases general contracting services, building materials, and infrastructure components to construct data center facilities, such as generators, computer room air conditioner (CRAC) cooling units, power distribution units, wiring, and environment monitoring equipment. The Company partners with local contractors and building suppliers and works closely with them as the data center construction progresses. Electricity is a large cost of operating a data center, and is generally purchased from the local utility.

IT Services and Hardware primarily purchases IT and telephony equipment that is either sold to a customer or used to provide service to the customer. The Company is a certified distributor of Cisco, EMC, Avaya, and Oracle equipment. Most of this equipment is shipped directly to the customer from the vendor manufacturing location, but the Company does maintain warehouse facilities for replacement parts and equipment testing and staging.

Competition

The telecommunications industry is very competitive, and the Company competes against larger and better-funded national providers. The Company has lost, and will likely continue to lose, access lines as a part of its customer base utilizes the services of competitive wireline or wireless providers in lieu of the Company’s local wireline service.

The Wireline segment faces competition from other local exchange carriers, wireless service providers, inter-exchange carriers, cable, broadband, and internet service providers. Wireless providers, particularly those that provide unlimited wireless service plans with no additional fees for long distance, offer customers a substitution service for the Company’s access lines. The Company believes this is the reason for the largest portion of the Company’s access line losses. Cable competitors that have existing service relationships with CBT’s customers also offer substitution services, such as VoIP and long distance voice services in the Company's operating areas. Partially as a result of wireless substitution and increased competition, the Company’s access lines decreased by 8% and long distance subscribers decreased by 7% in 2011 compared to 2010. In addition, the high-speed internet market is saturated in the Company’s operating area, and competition will continue to be fierce for market share against competitors and alternative services.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

The Wireless segment's operating territory is well saturated with competitors, including Verizon, AT&T, Sprint Nextel, T-Mobile, Leap, and TracFone. Many of these competitors offer very advanced and popular handsets which are not available to us and are a factor in attracting and retaining customers. All of our competitors are larger and have more resources to devote to advertising and promotional pricing to attract new customers.

The Data Center Colocation and IT Services and Hardware segments compete against numerous other data center colocation, information technology consulting, web-hosting, and computer system integration companies, many of which are large in scope and well-financed. The Company believes that participants in this market must grow rapidly and achieve significant scale to compete effectively. Other competitors may consolidate with larger companies or acquire software application vendors or technology providers, enabling them to more effectively compete. This consolidation could affect prices and other competitive factors in ways that could impede the ability of our businesses to compete successfully in the market.

Customers

Revenues from data center colocation services, business data transport and wireline entertainment continue to grow, while revenue from the Company’s legacy products, such as wireline residential voice service and wireless voice services, continues to decrease. The Company’s revenue portfolio is becoming more diversified than in the past, as the following comparison between 2011 revenue and 2006 revenue demonstrates.



Percentage of revenue	2011		2006		Change
Wireline local voice	18	%	36	%	(18	)	pts
Wireless	19	%	20	%	(1	)
Data Center Colocation	13	%	1	%	12
IT Services and Hardware	20	%	16	%	4
Wireline data	19	%	18	%	1
Wireline entertainment	2	%	0	%	2
Other Wireline, including long distance	9	%	9	%	—
Total	100	%	100	%

While total Wireless revenue has remained a consistent percent of total Company revenue, the mix of customer demand for Wireless services is trending toward more data services and less voice services. For 2006, Wireless service revenues were comprised of 87% voice services and 13% data services. In 2011, revenue from data services were 32% of total Wireless service revenues, a 19 point increase from 2006.

Additionally, the Company’s mix of business and residential customers is changing, as many of the Company’s growth products, such as data center services and data transport services, are geared primarily toward business customers. In 2011, the Company’s revenue mix was 66% to business customers and 34% to residential customers. By comparison, the Company’s 2006 revenues were comprised of 55% to business customers and 45% to residential customers.

The Company has receivables with one large customer that exceed 10% of the Company’s outstanding accounts receivable balance at December 31, 2011 and 2010.

As noted in the Data Center Colocation section above, the Company has focused its data center colocation marketing efforts toward large enterprise customers. At December 31, 2011, the Data Center Colocation segment has over 70 Fortune 1000 or comparable size international and privately-held companies as customers.

Employees

At December 31, 2011, the Company had approximately 3,100 employees, and approximately 33% of its employees are covered under a collective bargaining agreement with the Communications Workers of America (“CWA”), which is affiliated with the AFL-CIO. This agreement expires on August 9, 2014.

Executive Officers

Refer to Part III, Item 10. "Directors, Executive Officers and Corporate Governance" of this Annual Report on Form 10-K for information regarding executive officers of the registrant.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

Business Segment Information

The amounts of revenue, intersegment revenue, operating income, expenditures for long-lived assets, and depreciation and amortization attributable to each of the Company’s business segments for the years ended December 31, 2011, 2010, and 2009, and assets as of December 31, 2011, 2010, and 2009, are set forth in Note 15 to the Consolidated Financial Statements.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

Item 1A. Risk Factors

The Company’s substantial debt could limit its ability to fund operations, raise additional capital, and have a material adverse effect on its ability to fulfill its obligations and on its businesses and prospects generally.

The Company has a substantial amount of debt and has significant debt service obligations. As of December 31, 2011, the Company and its subsidiaries had outstanding indebtedness of $2,533.6 million, on which it incurred $215.0 million of interest expense in 2011, and had total shareowners’ deficit of $715.2 million. In addition, at December 31, 2011, the Company had the ability to borrow additional amounts under its revolving credit facility of $210.0 million and $79.6 million under its accounts receivable facility, subject to compliance with certain conditions. The Company may incur additional debt from time to time, subject to the restrictions contained in its credit facilities and other debt instruments.

The Company’s substantial debt could have important consequences, including the following:



•		the Company will be required to use a substantial portion of its cash flow from operations to pay principal and interest on its debt, thereby reducing the availability of cash flow to fund working capital, capital expenditures, strategic acquisitions, investments and alliances, and other general corporate requirements;
•		the Company’s interest rate on its revolving credit facility depends on the level of the Company’s specified financial ratios, and therefore could increase if the Company’s specified financial ratios require a higher rate;
•		the Company’s substantial debt will increase its vulnerability to adverse changes in the credit markets which could result in an increase in the Company's borrowing costs and may limit the availability of financing;
•		the Company’s debt service obligations could limit its flexibility to plan for, or react to, changes in its business and the industries in which it operates;
•		the Company’s level of debt and shareowners’ deficit may restrict it from raising additional financing on satisfactory terms to fund working capital, capital expenditures, strategic acquisitions, investments and joint ventures, and other general corporate requirements; and
•		the Company’s debt instruments require maintenance of specified financial ratios and other restrictive covenants. Failure to comply with these covenants, if not cured or waived, could limit availability to the cash required to fund operations and general obligations and could result in the Company’s dissolution, bankruptcy, liquidation, or reorganization.

The Company’s creditors and preferred stockholders have claims that are superior to claims of the holders of the Company's common stock. Accordingly, in the event of the Company’s dissolution, bankruptcy, liquidation, or reorganization, payment is first made on the claims of creditors of the Company and its subsidiaries, then preferred stockholders, and finally, if amounts are available, to holders of the Company's common stock.

The credit facilities and other indebtedness impose significant restrictions on the Company.

The Company’s debt instruments impose, and the terms of any future debt may impose, operating and other restrictions on the Company. These restrictions affect, and in many respects limit or prohibit, among other things, the Company’s ability to:



•		incur additional indebtedness;
•		create liens;
•		make investments;
•		enter into transactions with affiliates;
•		sell assets;
•		guarantee indebtedness;
•		declare or pay dividends or other distributions to shareholders;
•		repurchase equity interests;
•		redeem debt that is junior in right of payment to such indebtedness;
•		enter into agreements that restrict dividends or other payments from subsidiaries;
•		issue or sell capital stock of certain of its subsidiaries; and
•		consolidate, merge, or transfer all or substantially all of its assets and the assets of its subsidiaries on a consolidated basis.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

In addition, the Company’s credit facilities and debt instruments include restrictive covenants that may materially limit the Company’s ability to prepay debt and preferred stock. The agreements governing the credit facilities also require the Company to achieve and maintain compliance with specified financial ratios.

The restrictions contained in the terms of the credit facilities and its other debt instruments could:



•		limit the Company’s ability to plan for or react to market conditions or meet capital needs or otherwise restrict the Company’s activities or business plans; and
•		adversely affect the Company’s ability to finance its operations, strategic acquisitions, investments or alliances, or other capital needs, or to engage in other business activities that would be in its interest.

A breach of any of these restrictive covenants or the Company’s inability to comply with the required financial ratios would result in a default under some or all of the debt agreements. During the occurrence and continuance of a default, lenders may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable. Additionally, under the credit facilities, the lenders may elect not to provide loans until such default is cured or waived. The Company’s debt instruments also contain cross-acceleration provisions, which generally cause each instrument to be subject to early repayment of outstanding principal and related interest upon a qualifying acceleration of any other debt instrument. Failure to comply with these covenants, if not cured or waived, could limit the cash required to fund operations and its general obligations, and could result in the Company’s dissolution, bankruptcy, liquidation, or reorganization.

The Company depends on its revolving credit facility and accounts receivable facility to provide for its financing requirements in excess of amounts generated by operations.

The Company depends on its revolving credit facility and accounts receivable securitization facility ("Receivables Facility") to provide for temporary financing requirements in excess of amounts generated by operations. As of December 31, 2011, the Company had no outstanding borrowings or letters of credit under its revolving credit facility, leaving $210.0 million in additional borrowing availability. The revolving credit facility is funded by 11 different financial institutions, with no financial institution having more than 15% of the total facility. If one or more of these banks is not able to fulfill its funding obligations, the Company’s financial condition could be adversely affected.

As of December 31, 2011, the Company had a borrowing availability under its Receivables Facility of $102.8 million and a maximum borrowing limit of $105.0 million. The available borrowing capacity is calculated monthly based on the quantity and quality of outstanding accounts receivable and thus may be lower than the maximum borrowing limit. If the quality of the Company’s accounts receivables deteriorates, this will negatively impact the available capacity under this facility. As of December 31, 2011, the Company had $23.2 million of letters of credit outstanding under the Receivables Facility, leaving an unused borrowing availability of $79.6 million.

In addition, the Company’s ability to borrow under the revolving credit facility and accounts receivable facility is subject to the Company’s compliance with covenants, including covenants requiring compliance with specified financial ratios. Failure to satisfy these covenants would constrain or prohibit its ability to borrow under these facilities.

The servicing of the Company’s indebtedness requires a significant amount of cash, and its ability to generate cash depends on many factors beyond its control.

The Company’s ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory, and other factors, many of which are beyond its control. The Company cannot provide assurance that its business will generate sufficient cash flow from operations, additional sources of debt financing will be available, or future borrowings will be available under its credit or receivables facilities, in each case, in amounts sufficient to enable the Company to service its indebtedness or to fund other liquidity needs. If the Company cannot service its indebtedness, it will have to take actions such as reducing or delaying capital expenditures, strategic acquisitions, investments and joint ventures, or selling assets, restructuring or refinancing indebtedness, or seeking additional equity capital, which may adversely affect its shareholders, debt holders, and customers. The Company may not be able to negotiate remedies on commercially reasonable terms, or at all. In addition, the terms of existing or future debt instruments may restrict the Company from adopting any of these alternatives. The Company’s inability to generate the necessary cash flows could result in its dissolution, bankruptcy, liquidation, or reorganization.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

The Company depends on the receipt of dividends or other intercompany transfers from its subsidiaries.

Virtually all of the Company's operations are conducted through its subsidiaries, and most of the Company's debt is held at the parent company. Certain of the Company’s material subsidiaries are subject to regulatory authority that may potentially limit the ability of such subsidiary to distribute funds or assets. If the Company’s subsidiaries were to be prohibited from paying dividends or making distributions to the parent company, it may not be able to make the scheduled interest and principal repayments on its debt. This would have a material adverse effect on the Company’s liquidity and the trading price of the Company's common stock, preferred stock, and debt instruments, which could result in its dissolution, bankruptcy, liquidation, or reorganization.

The trading price of the Company's common stock may be volatile, and the value of an investment in the Company's common stock may decline.

The market price of the Company's common stock has been volatile and could be subject to wide fluctuations in response to, among other things, the risk factors described in this report and other factors beyond the Company's control, such as stock market volatility and fluctuations in the valuation of companies perceived by investors to be comparable to the Company.

The stock markets have experienced price and volume fluctuations that have affected the Company's stock price and the market prices of equity securities of many other companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions, may negatively affect the market price of the Company's stock.

Companies that have experienced volatility in the market price of their stock have periodically been subject to securities class action litigation. The Company may be the target of this type of litigation in the future. Securities litigation could result in substantial costs and/or damages and divert management's attention from other business concerns.

The Company’s access lines, which generate a significant portion of its cash flows and profits, are decreasing in number. If the Company continues to experience access line losses similar to the past several years, its revenues, earnings and cash flows from operations may be adversely impacted.

The Company generates a substantial portion of its revenues by delivering voice and data services over access lines. The Company's local telecommunications subsidiary, CBT, has experienced substantial access line losses over the past several years due to a number of factors, including increased competition and wireless and broadband substitution. The Company expects access line losses to continue for an unforeseen period of time. Failure to retain access lines without replacing such losses with an alternative source of revenue could adversely impact the Company’s revenues, earnings and cash flow from operations.

The Company operates in highly competitive industries, and its customers may not continue to purchase services, which could result in reduced revenue and loss of market share.

The telecommunications industry is very competitive, and the Company competes against many larger and better-funded national providers. Competitors may reduce pricing, create new bundled offerings, or develop new technologies, products, or services. If the Company cannot continue to offer reliable, competitively priced, value-added services, or if the Company does not keep pace with technological advances, competitive forces could adversely affect it through a loss of market share or a decrease in revenue and profit margins. CBT has lost, and will likely continue to lose, access lines as a part of its customer base utilizes the services of competitive wireline or wireless providers in lieu of the CBT’s local wireline service.

The Wireline segment faces competition from other local exchange carriers, wireless service providers, inter-exchange carriers, and cable, broadband, and internet service providers. Wireless providers, particularly those that provide unlimited wireless service plans with no additional fees for long distance, offer customers a substitution service for the Company’s access lines. The Company believes this is the reason for the largest portion of the Company’s access line losses. Also, cable competitors that have existing service relationships with CBT’s customers also offer substitution services, such as VoIP and long distance voice services in the Company's operating areas. Partially as a result of wireless substitution and increased competition, CBT’s access lines decreased by 8% and long distance subscribers decreased by 7% in 2011 compared to 2010. In addition, the high-speed internet market is saturated in CBT’s operating area, and competition will continue to be fierce for market share against competitors and alternative services. If the Company is unable to effectively implement strategies to retain access lines and long distance subscribers, or replace such access line loss with other sources of revenue, the Company’s Wireline business will be adversely affected.

Wireless competitors to the Company's subsidiary, Cincinnati Bell Wireless LLC ("CBW"), include national wireless service providers such as Verizon, AT&T, Sprint Nextel, T-Mobile, Leap and TracFone. The Company anticipates that continued competition could compress its margins for wireless products and services as carriers continue to offer more voice minutes and

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

data usage for equivalent or lower service fees. The wireless industry continues to experience rapid and significant technological changes and a dramatic increase in usage, particularly demand for and usage of data and other non-voice services. Increased network capacity could be required to meet increased customer demand. Should the resources required to fund the necessary network enhancements not be available, and CBW is unable to maintain its network quality level, then the Company’s ability to attract and retain customers, and therefore maintain and improve its operating margins, could be materially adversely affected. Many competitors offer very advanced and popular handsets which are not available to CBW and are a factor in attracting and retaining customers. CBW’s ability to compete will depend, in part, on its ability to anticipate and respond to various competitive factors affecting the telecommunications industry.

The Data Center Colocation and IT Services and Hardware segments compete against numerous other data center colocation, information technology consulting, web-hosting, and computer system integration companies, many of which are large in scope and well-financed. This market is rapidly evolving and highly competitive. Other competitors may consolidate with larger companies or acquire software application vendors or technology providers, enabling them to more effectively compete with the Data Center Colocation and IT Services and Hardware segments. The Company believes that many of the participants in this market must grow rapidly and achieve significant scale to compete effectively. This consolidation could affect prices and other competitive factors in ways that could impede the ability of these segments to compete successfully in the market.

The competitive forces described above could have a material adverse impact on the Company’s business, financial condition, results of operations, and cash flows.

The Company generates a substantial portion of its revenue by serving a limited geographic area.

The Company generates a substantial portion of its revenue by serving customers in the Greater Cincinnati and Dayton, Ohio areas for its Wireline, Wireless and IT Services and Hardware segments. In addition, most of its Data Center Colocation operations are located within Ohio and Texas. An economic downturn or natural disaster occurring in this limited operating territory could have a disproportionate effect on the Company’s business, financial condition, results of operations, and cash flows compared to similar companies of a national scope and similar companies operating in different geographic areas.

The regulation of the Company’s businesses by federal and state authorities may, among other things, place the Company at a competitive disadvantage, restrict its ability to price its products and services, and threaten its operating licenses.

Several of the Company’s subsidiaries are subject to regulatory oversight of varying degrees at both the state and federal levels, which may differ from the regulatory scrutiny faced by the Company’s competitors. A significant portion of CBT’s revenue is derived from pricing plans that require regulatory overview and approval. These regulated pricing plans limit the rates CBT charges for some services while its competition has typically been able to set rates for its services with limited restriction. In the future, regulatory initiatives that would put CBT at a competitive disadvantage or mandate lower rates for its services could result in lower profitability and cash flows for the Company. In addition, different regulatory interpretations of existing regulations or guidelines may affect the Company’s revenues and expenses in future periods.

At the federal level, CBT is subject to the Telecommunications Act of 1996 (the "1996 Act"), including the rules subsequently adopted by the FCC to implement the 1996 Act, which has impacted CBT’s in-territory local exchange operations in the form of greater competition. At the state level, CBT conducts local exchange operations in portions of Ohio, Kentucky, and Indiana, and, consequently, is subject to regulation by the Public Utilities Commissions in those states. Various regulatory decisions or initiatives at the federal or state level may from time to time have a negative impact on CBT’s ability to compete in its markets.

CBW’s FCC licenses to provide wireless services are subject to renewal and revocation. Although the FCC has routinely renewed wireless licenses in the past, the Company cannot be assured that challenges will not be brought against those licenses in the future. Revocation or non-renewal of CBW’s licenses could result in a cessation of CBW’s operations and consequently lower operating results and cash flows for the Company.

From time to time, different regulatory agencies conduct audits to ensure that the Company is in compliance with the respective regulations. The Company could be subject to fines and penalties if found to be out of compliance with these regulations, and these fines and penalties could be material to the Company’s financial condition.

There are currently many regulatory actions under way and being contemplated by federal and state authorities regarding issues that could result in significant changes to the business conditions in the telecommunications industry. Assurances cannot be given that changes in current or future regulations adopted by the FCC or state regulators, or other legislative, administrative, or judicial initiatives relating to the telecommunications industry, will not have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

Maintaining the Company’s telecommunications networks and data centers requires significant capital expenditures, and its inability or failure to maintain its telecommunications networks and data centers would have a material impact on its market share and ability to generate revenue.

As of December 31, 2011, the Company operates 20 data center facilities and any further data center expansion will involve significant capital expenditures for data center construction. The Company has also improved its wireline network over the past several years through increased capital expenditures for fiber optic cable in limited areas of its operating network, and in 2011, the Company began upgrading its wireless network to 4G, using HSPA+ technologies.

In order to provide appropriate levels of service to the Company's customers, the network infrastructure must be protected against damage from human error, natural disasters, unexpected equipment failure, power loss or telecommunications failures, terrorism, sabotage, or other intentional acts of vandalism. The Company’s networks may not address all of the problems that may be encountered in the event of a disaster or other unanticipated problems, which may result in disruption of service to customers.

The wireless industry continues to experience significant technological change, as evidenced by the ongoing improvements in the capacity and quality of digital technology, wireless data and 4G services. Verizon and AT&T deployed their 4G wireless networks in 2011. Other national and regional wireless carriers are continuously upgrading their networks with various technologies. CBW began construction of its 4G wireless network in 2011; however, the full implementation of this network will likely take several years, and CBW may lag behind certain of the national competitors in construction of the 4G network and the speeds associated with this network.

The Company may also incur significant additional capital expenditures as a result of unanticipated developments, regulatory changes, and other events that impact the business.

If the Company is unable or fails to adequately maintain or expand its networks to meet customer needs, there could be a material adverse impact on the Company’s market share and its ability to generate revenue.

Maintenance of CBW’s wireless network, growth in the wireless business, or the addition of new wireless products and services may require CBW to obtain additional spectrum and transmitting sites which may not be available or be available only on less than favorable terms.

CBW uses spectrum licensed to the Company for its wireless network. Introduction of new wireless products and services, as well as maintenance of the existing wireless business, may require CBW to obtain additional spectrum either to supplement or to replace the existing spectrum. Furthermore, the Company’s network depends on the deployment of radio frequency equipment on towers and on buildings. The Company, after the sale of its owned towers in December 2009, now leases substantially all the towers used in its wireless network operations, and the use of the towers under these leases is more restrictive than if these towers were owned by the Company. There can be no assurance that spectrum or the appropriate transmitting locations will be available to CBW or will be available on commercially favorable terms. Failure to obtain or retain any needed spectrum or transmitting locations could have a materially adverse impact on the wireless business as a whole, the quality of the wireless networks, and the ability to offer new competitive products and services.

Failure to anticipate the need for and introduce new products and services or to compete with new technologies may compromise the Company’s success in the telecommunications industry.

The Company’s success depends, in part, on being able to anticipate the needs of current and future business, carrier, and consumer customers. The Company seeks to meet these needs through new product introductions, service quality, and technological superiority. New products are not always available to the Company, as other competitors may have exclusive agreements for those new products. New products and services are important to the Company’s success as its industry is technologically driven, such that new technologies can offer alternatives to the Company’s existing services. The development of new technologies and products could accelerate the Company’s loss of access lines and increase wireless customer churn, which could have a material adverse effect on the Company’s revenue, results of operations, and cash flows.

The Company may encounter difficulties in executing its strategic plans for the data center colocation business.

The Company is in the process of evaluating the structural, capital and financial alternatives for its growing data center business. Management is considering options that may include, among others, operating the data center business under the current structure with no changes, a partial separation through a sale, initial public offering, or other transaction, or, depending on the value to shareholders, a full separation. There can be no assurance that a transaction will be pursued or completed.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

The Company's strategic plans also include significant expansion of its data center operations. Potential challenges and difficulties in implementing the Company’s data center colocation expansion plan include: identifying and obtaining the use of locations in which the Company believes there is sufficient demand for its data center colocation services; generating sufficient cash flow from operations or through additional financings to support these expansion plans; construction of world-class data center facilities on a timely basis; sale of the available data center space to enable appropriate returns; recruiting and maintaining a motivated work force; and installing and implementing new financial and other systems, procedures and controls to support this expansion plan with minimal delays.

These strategic actions could divert management’s attention and strain operational and financial resources. Due to unforeseen difficulties, the Company may be unable to execute its strategic plans for growing its data center business. Failure to do so would adversely affect its strategy of becoming a global data center colocation business.

The Company’s data center colocation strategy includes international expansion, which has inherent risk not previously encountered by the Company.

The Company’s data center operations are primarily based in the United States with lesser presence in the United Kingdom and Southeast Asia. Expanding international operations includes inherent risks such as: regulatory, tax, legal, and other items specific to particular foreign jurisdictions not previously encountered by the Company and for which the Company may have no or limited expertise; unexpected changes in regulatory, tax and political environments; the Company’s ability to secure and maintain the necessary physical and telecommunications infrastructure; challenges in staffing and managing foreign operations; fluctuations in foreign currency exchange rates; longer payment cycles and problems collecting accounts receivable; and laws and regulations on content distributed over the internet that are more restrictive than those currently in place in the United States. Any one or more of the aforementioned risks could materially and adversely affect the Company’s business and strategy for becoming a global data center colocation provider.

If the markets for outsourced information technology services decline, there may be insufficient demand for the Company’s services and, as a result, the Company’s business strategy and objectives may fail.

Services offered in the Company's IT outsourcing subsidiary, Cincinnati Bell Technology Solutions Inc. ("CBTS") and its data center colocation subsidiary, CyrusOne, are designed to enable a customer to focus on its core business while CBTS and CyrusOne manage and ensure the quality and security of the information technology infrastructure. Businesses may believe the risk of outsourcing is greater than the risk of managing their IT and data center operations themselves. If businesses do not continue to recognize the high cost and inefficiency of managing IT and data centers themselves, including the difficulties of upgrading technology, training and retaining skilled personnel with domain expertise, and matching IT cost with actual benefits, they may not continue to outsource their IT infrastructure and data center function to companies like CBTS and CyrusOne. Additionally, outsourcing may be associated with larger companies than CBTS and CyrusOne, and each may not be as successful as these larger companies. These risks could adversely affect the Company's business strategy and objectives and its ability to generate revenues, profits and cash flows.

The increased use of high power density equipment may limit the Company's ability to fully utilize some of its data centers.

Customers are increasing their use of high-density electrical power equipment in the Company's data centers which has significantly increased the demand for power. Because some of the Company's data centers were built a number of years ago, the current demand for electrical power may exceed the designated electrical capacity in these centers. As electrical power is a limiting factor in certain data centers, the ability to fully utilize those data centers may be limited. The availability of sufficient power may also pose a risk to the successful operation of new data centers. The ability to increase the power capacity is dependent upon several factors including, but not limited to, the local utility's ability to provide additional power, the length of time required to provide such power, and/or whether it is feasible to upgrade the electrical infrastructure of the data centers to deliver additional power to customers. Although the Company is currently designing and building to a very high power specification, there is a risk that demand will continue to increase and some of the data centers could become obsolete sooner than expected.

The Company's profitability could be adversely affected if demand for data center services is overestimated or underestimated.

Acquisition and development of new data center space requires significant resources and careful consideration of the demand for such services in future periods. If demand for data center services is underestimated, loss of sales opportunities may result from having insufficient available capacity to meet a customer's needs. If demand for data center services is overestimated, more data center space than is needed may be built or leased, resulting in higher operating costs and reduced profitability. To

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

mitigate these risks, expansion plans are continuously monitored against industry trends and customer demand. The goal is to incrementally build new space or expand existing facilities to manage capital expenditures and operating costs, or seek options in long-term leases to add additional space in future periods. Recently, the Company purchased land and buildings to expand data center capacity in 2012. If the demand for data center services has been misjudged, profitability could decline in future periods, and the investment returns may not be sufficiently high.

The long sales cycle for data center services may materially affect the data center business and results of its operations.

A customer’s decision to lease space in one of the Company’s data centers and to purchase additional services typically involves a significant commitment of resources, significant contract negotiations regarding the service level commitments, and significant due diligence on the part of the customer regarding the adequacy of the Company’s facilities, including the adequacy of carrier connections. As a result, the sale of data center space has a long sales cycle. Furthermore, the Company may expend significant time and resources in pursuing a particular sale or customer that may not result in revenue. Delays and failures in the data center sales cycle may have a material adverse effect on the Data Center Colocation segment and results of its operations.

The Company’s failure to meet performance standards under its agreements could result in customers terminating their relationships with the Company or customers being entitled to receive financial compensation, which could lead to reduced revenues and/or increased costs.

The Company’s agreements with its customers contain various requirements regarding performance and levels of service. If the Company fails to provide the levels of service or performance required by its agreements, customers may be able to receive service credits for their accounts and other financial compensation, and also may be able to terminate their relationship with the Company. In order to provide these levels of services, the Company is required to protect against human error, natural disasters, equipment failure, power failure, sabotage and vandalism, and have disaster recovery plans available for disruption of services. The failure to address these or other events, may result in a disruption of services. In addition, any inability to meet service level commitments or other performance standards could reduce the confidence of customers and could consequently impair the Company’s ability to attract and retain customers, which would adversely affect both the Company’s ability to generate revenues and operating results.

The data center business could be harmed by prolonged electrical power outages or shortages, increased costs of energy, or general lack of availability of electrical resources.

Data centers are susceptible to regional costs of power, power outages and shortages, and limitations on the availability of adequate power resources. The Company attempts to limit exposure to system downtime by using backup generators and power supplies. However, the Company may not be able to limit the exposure entirely in future occurrences even with those protections in place. In addition, global fluctuations in the price of power can increase the cost of energy, and although contractual price increase clauses may exist and, in some cases, the data center customer pays directly for the cost of power, the Company may not be able to pass all of these increased costs on to customers, or the increase in power costs may impact additional sales of data center space.

The Company’s failure to effectively integrate its acquisition of CyrusOne could result in an inability to realize the anticipated benefits of the purchase and adversely affect the Company’s business and operating results.

The Company’s acquisition of CyrusOne involves the integration of two companies that had previously operated independently, which is challenging and time-consuming. The process of integrating CyrusOne, a previously privately-held company, into the Company, a publicly traded company, could result in the loss of key employees, the disruption of its ongoing businesses, or inconsistencies in the respective standards, controls, procedures, and policies of the two companies, any of which could adversely affect the Company’s ability to maintain relationships with customers, suppliers, and employees. In addition, the successful combination of the companies will require the Company to dedicate significant management resources and to potentially expend additional funds for additional staffing, resources and control procedures, all of which could temporarily divert attention from the day-to-day business of the combined company. If the Company fails to complete an effective integration of CyrusOne into the Company, anticipated growth in revenue, profitability, and cash flow resulting from the purchase of CyrusOne could be adversely affected.

The Company’s future cash flows could be adversely affected if it is unable to fully realize its deferred tax assets.

As of December 31, 2011, the Company had net deferred income taxes of $453.7 million, which are primarily composed of deferred tax assets associated with U.S. federal net operating loss carryforwards of $394.3 million and state and local net operating loss carryforwards of $59.6 million. The Company has recorded valuation allowances against deferred tax assets

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

related to certain state and local net operating losses and other deferred tax assets due to the uncertainty of the Company’s ability to utilize the assets within the statutory expiration period. The use of the Company’s deferred tax assets enables it to satisfy current and future tax liabilities without the use of the Company’s cash resources. If the Company is unable for any reason to generate sufficient taxable income to fully realize its deferred tax assets, or if the use of its net operating loss carryforwards is limited by Internal Revenue Code Section 382 or similar state statute, the Company’s net income, shareowners’ deficit, and future cash flows could be adversely affected.

A few large customers account for a significant portion of the Company’s revenues and accounts receivable. The loss or significant reduction in business from one or more of these large customers could cause operating revenues to decline significantly and have a materially adverse long-term impact on the Company’s business.

The Company has receivables with one large customer that exceed 10% of the Company’s outstanding accounts receivable balance. Contracts with customers may not sufficiently reduce the inherent risk that customers may terminate or fail to renew their relationships with the Company. As a result of customer concentration, the Company’s results of operations and financial condition could be materially affected if the Company lost one or more large customers or if services purchased were significantly reduced. If one or more of the Company’s larger customers were to default on its accounts receivable obligations, the Company could be exposed to potentially significant losses in excess of the provisions established. This could also negatively impact the available capacity under the accounts receivable facility.

The Company depends on a number of third-party providers, and the loss of, or problems with, one or more of these providers may impede the Company's growth or cause it to lose customers.

The Company depends on third-party providers to supply products and services. For example, many of the Company’s information technology and call center functions are performed by third-party providers, network equipment is purchased from and maintained by vendors, data center space is leased from landlords, and the Company is dependent on third-parties to provide internet connectivity to certain of the data centers.

Certain of the data centers are dependent upon third-party telecommunication companies to provide network connectivity. Any carrier may elect not to offer its services within the data centers, and any carrier that has decided to provide internet connectivity to our data centers may elect not to continue to do so for any period of time. Furthermore, some carriers are experiencing business difficulties or have announced consolidations and may be forced to downsize or terminate connectivity within the data centers, which could have an adverse affect on the business.

In addition, almost half of the wireless towers used by CBW are managed by a single independent service provider.

Any failure on the part of suppliers to provide the contracted services, additional required services, additional products, or additional leased space could impede the growth of the Company’s business and cause financial results to suffer.

A failure of back-office information technology systems could adversely affect the Company’s results of operations and financial condition.

The efficient operation of the Company’s business depends on back-office information technology systems. The Company relies on back-office information technology systems to effectively manage customer billing, business data, communications, supply chain, order entry and fulfillment and other business processes. A failure of the Company’s information technology systems to perform as anticipated could disrupt the Company’s business and result in a failure to collect accounts receivable, transaction errors, processing inefficiencies, and the loss of sales and customers, causing the Company’s reputation and results of operations to suffer. In addition, information technology systems may be vulnerable to damage or interruption from circumstances beyond the Company’s control, including fire, natural disasters, systems failures, security breaches and viruses. Any such damage or interruption could have a material adverse effect on the Company’s business.

The business could be negatively impacted by cybersecurity threats.

Cybersecurity threats could adversely affect the wireline or wireless networks, the electronic payment system, or the corporate network. Such threats could result in disruption of customer service, unauthorized access to or misappropriation of confidential customer data, or damage to our internal network. Preventative measures in place to mitigate such risks include use of dedicated private networks, strong user names and passwords, intrusion protection systems, anti-virus software, and encryption and authentication technology. Weekly system scans are performed on the most critical systems to identify potential vulnerabilities. These events could disrupt operations, result in a loss of customers, lead to adverse publicity, or require significant amounts of capital to remedy the cybersecurity breach.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

The loss of any of the senior management team or attrition among key sales associates could adversely affect the Company’s business, financial condition, results of operations, and cash flows.

The Company’s success will continue to depend to a significant extent on its senior management team and key sales associates. Senior management has specific knowledge relating to the Company and the industry that would be difficult to replace. The loss of key sales associates could hinder the Company’s ability to continue to benefit from long-standing relationships with customers. The Company cannot provide any assurance that it will be able to retain the current senior management team or key sales associates. The loss of any of these individuals could adversely affect the Company’s business, financial condition, results of operations, and cash flows.

Future declines in the fair value of the Company's wireless licenses could result in future impairment losses.

The market values of wireless licenses have varied dramatically over the last several years and may vary significantly in the future. In 2009, the Company incurred a loss of $4.8 million on the sale of spectrum it was not using in Indianapolis, Indiana. Further valuation swings could occur if:



•		consolidation in the wireless industry allows or requires carriers to sell significant portions of their wireless spectrum holdings;
•		a sudden large sale of spectrum by one or more wireless providers occurs;
•		market prices decline as a result of the sale prices in recent and upcoming FCC auctions; or
•		significant technology changes occur.

In addition, the price of wireless licenses could decline as a result of the FCC’s pursuit of policies designed to increase the number of wireless licenses available in each of the Company’s markets. If the market value of wireless licenses were to decline significantly, the value of the Company’s wireless licenses could be subject to non-cash impairment charges.

The Company reviews for potential impairments to its wireless licenses annually, or more frequently, when there is evidence that events or changes in circumstances indicate that an impairment condition may exist. A significant impairment loss, most likely resulting from reduced cash flow, could have a material adverse effect on the Company’s operating income and on the carrying value of the wireless licenses on the balance sheet.

The uncertain economic environment, including uncertainty in the U.S. and world securities markets, could impact the Company's business and financial condition.

The uncertain economic environment could have an adverse effect on the Company's business and financial liquidity. The Company's primary source of cash is customer collections. If economic conditions were to worsen, some customers may cancel services or have difficulty paying. These conditions could result in lower revenues and increases in the allowance for doubtful accounts, which would negatively affect the results of operations. Furthermore, the sales cycle could be further lengthened if business customers slow spending or delay decision-making on the Company's products and services, which could adversely affect revenues. If competitors lower prices as a result of economic conditions, the Company could also experience pricing pressure. If the economies of the U.S. and the world deteriorate, this could have a material adverse effect on the Company's business, financial condition, results of operations, and cash flows.

In addition, investment returns of the Company’s pension funds depend largely on trends in the U.S. and world securities markets and the U.S. and world economies in general. Future investment losses could cause a further decline in the value of plan assets, which the Company would be required to recognize over the next several years under generally accepted accounting principles. Additionally, the Company’s postretirement costs are adversely affected by increases in medical and prescription drug costs. If the Company incurs future investment losses or future investment gains that are less than expected, or if medical and prescription drug costs increase significantly, the Company would expect to face even higher annual net pension and postretirement costs.

Adverse changes in the value of assets or obligations associated with the Company’s employee benefit plans could negatively impact shareowners’ deficit and liquidity.

The Company sponsors three noncontributory defined benefit pension plans: one for eligible management employees, one for non-management employees, and one supplemental, nonqualified, unfunded plan for certain senior executives. The Company’s consolidated balance sheets indirectly reflect the value of all plan assets and benefit obligations under these plans. The accounting for employee benefit plans is complex, as is the process of calculating the benefit obligations under the plans. Further adverse changes in interest rates or market conditions, among other assumptions and factors, could cause a significant

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

increase in the Company’s benefit obligations or a significant decrease of the asset values, without necessarily impacting the Company’s net income. In addition, the Company’s benefit obligations could increase significantly if it needs to unfavorably revise the assumptions used to calculate the obligations. These adverse changes could have a further significant negative impact on the Company’s shareowners’ deficit. In addition, with respect to the Company’s pension plans, the Company expects to make approximately $200 million of estimated cash contributions to its qualified pension plans for the years 2012 to 2019, of which $30 million is expected to be contributed in 2012. Further, adverse changes to plan assets could require the Company to contribute additional material amounts of cash to the plan or could accelerate the timing of required payments.

Third parties may claim that the Company is infringing upon their intellectual property, and the Company could suffer significant litigation or licensing expenses or be prevented from selling products.

Although the Company does not believe that any of its products or services infringe upon the valid intellectual property rights of third parties, the Company may be unaware of intellectual property rights of others that may cover some of its technology, products, or services. Any litigation growing out of third-party patents or other intellectual property claims could be costly and time-consuming and could divert the Company’s management and key personnel from its business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Resolution of claims of intellectual property infringement might also require the Company to enter into costly license agreements. Likewise, the Company may not be able to obtain license agreements on acceptable terms. The Company also may be subject to significant damages or injunctions against development and sale of certain of its products. Further, the Company often relies on licenses of third-party intellectual property for its businesses. The Company cannot ensure these licenses will be available in the future on favorable terms or at all.

Third parties may infringe upon the Company’s intellectual property, and the Company may expend significant resources enforcing its rights or suffer competitive injury.

The Company’s success depends in significant part on the competitive advantage it gains from its proprietary technology and other valuable intellectual property assets. The Company relies on a combination of patents, copyrights, trademarks and trade secrets protections, confidentiality provisions, and licensing arrangements to establish and protect its intellectual property rights. If the Company fails to successfully enforce its intellectual property rights, its competitive position could suffer, which could harm its operating results.

The Company may also be required to spend significant resources to monitor and police its intellectual property rights. The Company may not be able to detect third-party infringements and its competitive position may be harmed before the Company does so. In addition, competitors may design around the Company’s technology or develop competing technologies. Furthermore, some intellectual property rights are licensed to other companies, allowing them to compete with the Company using that intellectual property.

The Company could incur significant costs resulting from complying with, or potential violations of, environmental, health, and human safety laws.

The Company’s operations are subject to laws and regulations relating to the protection of the environment, health, and human safety, including those governing the management and disposal of, and exposure to, hazardous materials and the cleanup of contamination, and the emission of radio frequency. While the Company believes its operations are in substantial compliance with environmental, health, and human safety laws and regulations, as an owner or operator of property, and in connection with the current and historical use of hazardous materials and other operations at its sites, the Company could incur significant costs resulting from complying with or violations of such laws, the imposition of cleanup obligations, and third-party suits. For instance, a number of the Company’s sites formerly contained underground storage tanks for the storage of used oil and fuel for back-up generators and vehicles. In addition, a few sites currently contain underground fuel tanks for back-up generator use, and many of the Company’s sites have aboveground fuel tanks for similar purposes.

Item 1B. Unresolved Staff Comments

None.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

Item 2. Properties

Cincinnati Bell Inc. and its subsidiaries own or maintain properties in Ohio, Texas, Kentucky, Indiana, Michigan, Illinois, Arizona, England and Singapore. Principal office locations are in Cincinnati, Ohio and Houston, Texas.

The property of the Company comprises telephone plant and equipment in its local telephone franchise area (i.e., Greater Cincinnati), the infrastructure associated with its wireless business in the Greater Cincinnati and Dayton, Ohio operating areas, and data center facilities. Each of the Company’s subsidiaries maintains some investment in furniture and office equipment, computer equipment and associated operating system software, application system software, leasehold improvements, and other assets.

With regard to its local telephone operations, the Company owns substantially all of the central office switching stations and the land upon which they are situated. Some business and administrative offices are located in rented facilities, some of which are recorded as capital leases. The Company’s out of territory Wireline network assets include a fiber network plant, internet protocol and circuit switches and integrated access terminal equipment.

In its wireless operations, CBW both owns and leases the locations that house its switching and messaging equipment. CBW leases substantially all of its tower sites, primarily from tower companies and other wireless carriers. CBW’s tower leases are typically either for a fixed 20-year term ending in December 2029 or renewable on a long-term basis at CBW’s option, both with predetermined rate escalations. In addition, CBW leases 13 company-run retail locations.

As of December 31, 2011, the Data Center Colocation segment operated the following data center facilities:



			Data Center
			Colocation
Market	Owned	Leased	(sq. ft. in thousands)
Cincinnati	4	2	437
Houston	2	1	153
Dallas	—	4	124
Austin	—	1	15
Other	1	5	34
	7	13	763

As of December 31, 2011, the Data Center Colocation segment also owned certain properties for future development into data centers, including 40 acres of land in Phoenix, Arizona and 10 acres of land along with a 127,000 square foot building in San Antonio, Texas. In January 2012, the Company purchased a 700,000 square foot building on 30 acres of land in Dallas, Texas for redevelopment into a data center.

The data centers provide power, environmental controls, high-speed and high-bandwidth point-to-point optical network connections, and 24-hour monitoring of the customer’s computer equipment. The Company’s lease of certain data center facilities represents the "lease of the building shell", and the capital expenditures required to transform the leased building shells into top-tier data centers represent amounts that are several times the value of the leased building shells. The Data Center Colocation segment also has leased office space in its markets.

For additional information about the Company’s properties, see Note 5 to the Consolidated Financial Statements.

Table of Contents



Form 10-K Part I		Cincinnati Bell Inc.

Item 3. Legal Proceedings

Cincinnati Bell and its subsidiaries are involved in a number of legal proceedings. Liabilities are established for legal claims when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. In many lawsuits and arbitrations, including most class action lawsuits, it is not possible to determine whether a liability has been incurred, or to estimate the ultimate or minimum amount of the liability until the case is close to resolution, in which case a liability will not be recognized until that time.

On July 5, 2011, a shareholder derivative action, captioned NECA-IBEW Pension Fund (The Decatur Plan), derivatively on behalf of Cincinnati Bell Inc. v. Phillip R. Cox, et al., was filed in the United States District Court for the Southern District of Ohio, naming certain directors and officers of the Company and Towers Watson & Co. (the Company's compensation consulting firm), as defendants, and naming the Company as a nominal defendant. The complaint alleges that the director defendants breached their duty of loyalty in connection with 2010 executive compensation decisions and that the officer defendants were unjustly enriched. The complaint seeks unspecified compensatory damages on behalf of the Company from the director and officer defendants and Towers Watson & Co., various forms of equitable and/or injunctive relief, and attorneys' and other professional fees and costs. On September 20, 2011, the court denied the motion to dismiss the officer and director defendants, which sought dismissal for failure to make demand on the directors and for failure to state a claim. On September 26, 2011, the court denied plaintiff's motion for preliminary injunction, which sought an injunction enjoining the directors from effectuating the 2010 executive compensation plan and the imposition of a constructive trust. On October 4, 2011, the officer and director defendants filed a motion to dismiss the action for lack of subject matter jurisdiction. That motion has not been ruled upon by the court. The officer and director defendants believe the suit is without merit and intend to vigorously defend against it.

Two additional shareholder derivative actions, captioned Pinchus E. Raul, derivatively on behalf of Cincinnati Bell Inc. v. John F. Cassidy, et al. and Dennis Palkon, derivatively on behalf of Cincinnati Bell Inc. v. John F. Cassidy, et al., were filed in the Court of Common Pleas, Hamilton County, Ohio, on July 8, 2011 and July 13, 2011, respectively. The two state court actions name the current directors and certain officers as defendants and the Company as a nominal defendant, assert allegations similar to those asserted in the federal court action, and seek relief similar to that requested in the federal action. The state court actions also allege that the director defendants breached their fiduciary duties by participating in issuing materially false and/or misleading statements in the Company's 2011 Proxy Statement. On August 11, 2011, the state court actions were consolidated under Case No. A1105305. On November 1, 2011, Plaintiff Raul filed a Second Amended Verified Shareholder Derivative Complaint ("State Court Action"). On November 29, 2011, the director and officer defendants filed a motion to dismiss the State Court Action, for failing to make demand on the directors and failing to state a claim. On the same day, Plaintiff Raul filed a motion seeking preliminary approval of the proposed settlement and notice to shareholders.

On December 20, 2011, Cincinnati Bell Inc. and the other defendants entered into a Stipulation and Agreement of Settlement (the "Settlement Agreement") with the plaintiff in the State Court Action. On January 13, 2012, the Hamilton County, Ohio, Court of Common Pleas entered a preliminary approval order approving the Settlement Agreement. The terms of the settlement are set forth in the Stipulation and include (1) a variety of corporate governance changes to be initiated by the Company and the Compensation Committee of the Board of Directors, that, among other things, more clearly communicate the Company's executive compensation practices to its shareholders, thus assisting the Company's shareholders' understanding of how these policies are applied to covered employees; and (2) payment of plaintiff's counsel's attorney fees and expenses. The settlement is specifically contingent on the entry of a final order and judgment of the Court approving the settlement and dismissing the action with prejudice. The Court has scheduled a fairness hearing for April 16, 2012 to determine whether to approve the proposed settlement and dismiss all claims.

Based on information currently available, consultation with counsel, available insurance coverage and established reserves, management believes the eventual outcome of all claims will not individually, or in the aggregate, have a material effect on its financial position, results of operations or cash flows.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market Information

The Company’s common shares (symbol: CBB) are listed on the New York Stock Exchange. The high and low closing sale prices during each quarter for the last two fiscal years are listed below:



		First		Second		Third		Fourth
		Quarter		Quarter		Quarter		Quarter
2011	High	$	3.12	$	3.32	$	3.60	$	3.28
	Low	$	2.46	$	2.64	$	2.84	$	2.80
2010	High	$	3.62	$	3.74	$	3.08	$	2.81
	Low	$	2.73	$	2.98	$	2.30	$	2.34

(b) Holders

As of January 31, 2012, the Company had 12,610 holders of record of the 196,589,670 outstanding common shares and the 155,250 outstanding shares of the 6 ³/₄% Cumulative Convertible Preferred Stock.

The Company paid dividends on the 6 ³/₄% Cumulative Convertible Preferred Stock on a quarterly basis for each of 2011 and 2010. The Company did not pay any common stock dividends for the years ended December 31, 2011 and 2010 and does not currently intend to pay dividends on its common stock for the foreseeable future.

(d) Securities Authorized For Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2011 regarding securities of the Company to be issued and remaining available for issuance under the equity compensation plans of the Company:



Plan Category	Number of securities to be issued upon exercise of outstanding stock options, awards, warrants and rights		Weighted-average exercise price of outstanding stock options, awards, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders	16,855,474	(1)	$	3.57	6,955,209
Equity compensation plans not approved by security holders	249,276	(2)	—		—
Total	17,104,750		$	3.57	6,955,209

(1)

Includes 14,152,401 outstanding stock options and stock appreciation rights not yet exercised, 871,880 shares of time-based restricted stock, and 1,831,193 shares of performance-based awards, restrictions on which have not expired as of December 31, 2011. Awards were granted under various incentive plans approved by Cincinnati Bell Inc. shareholders. The number of performance-based awards assumes the maximum awards that can be earned if the performance conditions are achieved.

(2)

The shares to be issued relate to deferred compensation in the form of previously received special awards and annual awards to non-employee directors pursuant to the “Deferred Compensation Plan for Outside Directors.” From 1997 through 2004, the directors received an annual award of phantom stock equivalent to a number of common shares. Subsequent to 2004, the annual award is the equivalent of 6,000 common shares. As a result of a plan amendment effective as of January 1, 2005, upon termination of Board service, non-employee directors are required to take distribution of all annual phantom stock awards in cash. Therefore, the number of actual shares of common stock to be issued pursuant to the plan as of December 31, 2011 is approximately 14,000. This plan also provides that no awards are payable until such non-employee director completes at least five years of active service as a non-employee

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

director, except if he or she dies while serving as a member of the Board of Directors.

(e) Stock Performance

The graph below shows the cumulative total shareholder return assuming the investment of $100 on December 31, 2006 (and the reinvestment of dividends thereafter) in each of (i) the Company’s common shares, (ii) the S&P 500 ® Stock Index, and (iii) the S&P® Integrated Telecommunications Services Index.

(f) Issuer Purchases of Equity Securities

The following table provides information regarding the Company’s purchases of its common stock during the quarter ended December 31, 2011:



Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs *	Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs (in millions)*
12/1/2011 - 12/31/2011	249,308	$	3.05	249,308	129.2



*	In February 2010, the Board of Directors approved an additional plan for the repurchase of the Company’s outstanding common stock in an amount up to $150 million. The Company may repurchase shares when management believes the share price offers an attractive value and to the extent its available cash is not needed for data center growth and other opportunities. This new plan does not have a stated maturity.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

Item 6. Selected Financial Data

The Selected Financial Data should be read in conjunction with the Consolidated Financial Statements and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in this document.



(dollars in millions, except per share amounts)	2011			2010 (a)			2009			2008			2007
Operating Data
Revenue	$	1,462.4		$	1,377.0		$	1,336.0		$	1,403.0		$	1,348.6
Cost of services and products, selling, general and administrative, depreciation, and amortization expense	1,139.9			1,054.9			1,030.7			1,078.7			1,026.4
Other operating costs and losses (b)	63.0			22.8			9.8			19.1			39.8
Operating income	259.5			299.3			295.5			305.2			282.4
Interest expense	215.0			185.2			130.7			139.7			154.9
Loss (gain) on extinguishment of debt	—			46.5			10.3			(14.1		)	0.7
Net income	$	18.6		$	28.3		$	89.6		$	102.6		$	73.2
Earnings per common share
Basic	$	0.04		$	0.09		$	0.37		$	0.39		$	0.25
Diluted	$	0.04		$	0.09		$	0.37		$	0.38		$	0.24
Dividends declared per common share	$	—		$	—		$	—		$	—		$	—
Weighted-average common shares outstanding
Basic	196.8			201.0			212.2			237.5			247.4
Diluted	200.0			204.0			215.2			242.7			256.8

Financial Position
Property, plant and equipment, net	$	1,400.5		$	1,264.4		$	1,123.3		$	1,044.3		$	933.7
Total assets	2,714.7			2,653.6			2,064.3			2,086.7			2,019.6
Total long-term obligations (c)	3,073.5			2,992.7			2,395.1			2,472.2			2,369.6

Other Data
Cash flow provided by operating activities	$	289.9		$	300.0		$	265.6		$	403.9		$	308.8
Cash flow used in investing activities	(244.7		)	(675.5		)	(93.8		)	(250.5		)	(263.5		)
Cash flow (used in) provided by financing activities	(48.8		)	429.8			(155.5		)	(172.8		)	(98.6		)
Capital expenditures	(255.5		)	(149.7		)	(195.1		)	(230.9		)	(233.8		)



(a)	Results for 2010 include the acquisition of CyrusOne from the acquisition date of June 11, 2010 to the end of the year. See Note 3 to the Consolidated Financial Statements.

(b)	Other operating costs and losses consist of restructuring charges, acquisition costs, curtailment losses (gains), goodwill impairment, asset impairments, gain/loss on sale of assets, and an operating tax settlement.

(c)	Total long-term obligations comprise long-term debt less current portion, pension and postretirement benefit obligations, and other noncurrent liabilities. See Notes 7, 10 and 11 to the Consolidated Financial Statements for discussion related to 2011 and 2010.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Annual Report on Form 10-K and the documents incorporated by reference herein contain forward-looking statements regarding future events and results that are subject to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, are statements that could be deemed forward-looking statements. See "Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement," for further information on forward-looking statements.

Executive Summary

In 2011, we continued to execute on our strategy of becoming the preferred global data center colocation provider to the Fortune 1000. We expanded our data center capacity by 124,000 square feet, including international markets of London and Singapore, and sold 110,000 square feet. Customer demand for outsourced data center services is expected to be strong in future years. We plan to further grow operations in 2012 by expanding existing data center facilities and building new facilities in new geographies, such as Phoenix and San Antonio.

Revenues generated from our fiber-based Fioptics products, including voice, internet, and entertainment services, grew by $18.9 million in 2011. However, revenue from traditional wireline services continue to decline as customers seek out alternative technologies to a traditional landline. Our wireless service revenue also declined in 2011 as competition for these customers continues to be quite intense. Significant operating cost savings were realized in 2011 from sourcing and other cost-saving initiatives.

Cash flows from operations in 2011 were largely utilized to fund the expansion of our data center business and Fioptics services. The Company has no bond or bank debt maturities until 2015, and approximately 90% of our debt maturities are due in 2017 and after. Given that the Company has no debt maturities to repay in the next several years, the Company plans to invest further in its data center colocation operations, including capital expenditures, acquisitions, and working capital, both within and outside its traditional operating territory as we execute on our strategic plan of becoming the preferred global data center colocation provider.

Highlights for 2011 were as follows:

Data Center Colocation

Data Center Colocation revenue increased by 47% in 2011 to $184.7 million, primarily due to the acquisition of CyrusOne in June 2010 and new business earned. Operating income for the year totaled $46.4 million, an increase of $12.2 million over 2010, which was also primarily due to the increase in operating income generated by CyrusOne. Total data center capacity increased by 19% from the prior year to 763,000 square feet as of December 31, 2011, compared to the prior year total of 639,000 square feet of available space. Utilization remained high at 88% for 2011, consistent with the 2010 utilization.

Data Center Colocation spent $118.5 million on capital expenditures in 2011 to build 124,000 square feet of data center space, supporting the continued high growth of this segment.

Wireline

Wireline revenue decreased 1% to $732.1 million due to reductions in voice revenue caused by continued ILEC access line losses. The Company was able to partially offset the access line losses through increased Fioptics and VoIP revenues. The Company ended the year with 621,300 total access lines, a loss of 8% compared to 674,100 access lines at December 31, 2010 and consistent with the 2010 losses.

Fioptics continued to show strong growth during 2011, and as of December 31, 2011, the Company now “passes” and is able to provide its Fioptics services to 134,000 units, about 20% of Greater Cincinnati. The Company had 39,600 entertainment customers as of December 31, 2011, an increase of 41% compared to the end of 2010. The Company also provided and bundled internet and voice service with Fioptics, resulting in 39,300 high-speed internet customers and 29,200 voice customers on Fioptics at the end of 2011. Importantly, the Company's penetration rate of consumer units passed with Fioptics was more

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

than 30% within twelve months of deploying Fioptics in a particular area, providing appropriately strong returns for this investment.

The decrease in access lines required additional cost reduction programs, resulting in restructuring charges of $7.7 million in 2011. These restructuring charges included future lease costs on abandoned office space, workforce reductions to address decreasing Wireline revenue, and the integration of certain functions of the Wireline and IT Services and Hardware segments.

Wireline operating income of $228.5 million declined by $5.0 million compared to 2010 as the revenue decrease from access line losses more than offset the cost reduction initiatives.

Wireless

Wireless service revenue of $252.4 million in 2011 decreased by 6% compared to 2010, primarily due to 50,000 fewer subscribers. The Company believes it continued to lose subscribers in 2011 due, in part, to customer preference for competitor smartphones, such as the iPhone^TM. During 2011, the Company continued to focus its marketing and other resources on acquiring new subscribers who use smartphones, which led to an increase of smartphone postpaid subscribers of 10% to 106,000 subscribers at December 31, 2011 compared to 96,000 subscribers at December 31, 2010. Smartphone subscribers now represent 34% of the Company's postpaid subscribers and have contributed to increased data revenue per subscriber (e.g., text messaging, emails, and internet service), which partly offset a decline in voice revenue. The Company earned $14.54 per month on average from postpaid subscribers for data service in 2011 compared to $11.69 in 2010.

Wireless operating income of $3.3 million declined by $53.0 million compared to 2010. The decrease in operating income is primarily the result of a goodwill impairment charge of $50.3 million.

IT Services and Hardware

Sales of telecom and IT equipment totaled $206.0 million during 2011, an 18% increase from 2010. This increase was primarily due to increased capital spending by business customers as the economy continued to improve in 2011. Professional and managed service revenues increased by $14.7 million in 2011 as customers continued to expand upon IT outsourcing and consulting projects.

Operating income increased by $5.5 million in 2011, as a result of margin on higher revenues, lower restructuring charges, and cost reductions.

Consolidated Results of Operations

2011 Compared to 2010

Service revenue was $1,250.8 million in 2011, an increase of $51.5 million compared to 2010. Data center revenue increased by $59.4 million, due to expansion of data center facilities and the acquisition of CyrusOne in 2010. Professional and managed services revenue increased by $14.7 million in 2011. Partially offsetting these increases, wireless service revenue declined by $16.8 million in 2011. Growth in Fioptics, VoIP and audio conferencing service revenue was largely offset by declines in local voice, long distance and DSL revenues.

Product revenue totaled $211.6 million in 2011, an increase of $33.9 million, or 19%, compared to 2010. Sales of telecommunications and IT hardware grew by $31.1 million compared to 2010, which reflects increased spending by business customers.

Cost of services was $464.3 million in 2011 compared to $413.9 million in 2010, an increase of $50.4 million, or 12%. Payroll and payroll related costs increased by $20.1 million compared to 2010 due to overtime as well as personnel added to support growth in IT services and data center operations. Other data center costs increased by $18.7 million primarily due to expansion of data center facilities and the acquisition of CyrusOne in 2010. Network costs increased by $7.2 million in 2011 due to growth in Fioptics, audio conferencing and VoIP services, and increased data usage. Contract services increased by $2.3 million in 2011 primarily due to a large number of telephony installations and out-of-territory support performed by outside contractors.

Cost of products sold was $213.0 million in 2011 compared to $190.6 million in the prior year, an increase of $22.4 million, or 12%. This increase resulted from higher sales of telecommunications and IT hardware in 2011.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

Selling, general and administrative ("SG&A") expenses were $263.1 million in 2011, a decrease of $7.8 million, or 3%, compared to 2010. Lower payroll expense, contract services, advertising and bad debt expense were incurred in 2011 compared to the prior year. Partially offsetting these savings were higher legal and consulting costs and non-employee commissions. Also, the release of a previously established indemnification liability lowered 2011 SG&A costs by $1.2 million.

Depreciation and amortization was $199.5 million in 2011, an increase of $20.0 million compared to the prior year. Higher depreciation and amortization was incurred in 2011 due to tangible and intangible assets acquired with CyrusOne in June 2010, as well as the expansion of several data center facilities.

Restructuring charges were $12.2 million in 2011 compared to $13.7 million in the prior year. In both years, restructuring charges included costs associated with employee separations, lease abandonments and contract terminations. In 2011, pension curtailment losses of $4.2 million resulted from reductions in future pension service credits which arose from a new contract with bargained employees. In 2011, the sale of assets associated with our home security monitoring business resulted in a gain of $8.4 million. In 2011, goodwill impairment losses of $50.3 million were recorded related to the Wireless segment. Asset impairment losses, excluding goodwill, were $2.1 million in 2011, resulting from abandonment of certain facilities, equipment, and capital projects. No asset impairment losses were recorded in 2010. Acquisition costs of $2.6 million were incurred in 2011, as acquisition opportunities were investigated in 2011, but none were completed. In 2010, acquisition costs of $9.1 million were incurred due to the completion of the CyrusOne acquisition.

Interest expense was $215.0 million in 2011 compared to $185.2 million in 2010, an increase of $29.8 million. Average debt outstanding was higher in 2011 compared to the prior year primarily due to the acquisition of CyrusOne. In addition, the average interest rate on outstanding debt was also higher in 2011. In 2010, a loss on debt extinguishment of $46.5 million was recognized upon the refinancing of the Company's 8 ³/₈% Senior Notes due 2014 and repayment of the Tranche B Term Loan.

Income tax expense was $25.0 million in 2011 compared to $38.9 million in the prior year. The lower tax provision reflects a decrease in pre-tax income in 2011 and the effects of one-time discrete adjustments related to 2010. The Company has certain non-deductible expenses, including interest on securities originally issued to acquire its broadband business (the "Broadband Securities") or securities that the Company has subsequently issued to refinance the Broadband Securities. In periods without tax law changes, the Company expects its effective tax rate to exceed statutory rates primarily due to the non-deductible expenses associated with the Broadband Securities. The Company used federal and state net operating losses to defray payment of federal and state tax liabilities. As a result, the Company had cash income tax refunds of $1.2 million in 2011.

2010 Compared to 2009

Service revenue was $1,199.3 million in 2010, an increase of $29.4 million compared to 2009. Data center revenues increased by $53.5 million primarily due to the acquisition of CyrusOne in June 2010. Professional and managed services increased by $9.6 million compared to 2009. These increases were partially offset by declines in local voice revenues from access line losses and wireless service revenues from lower postpaid subscribers.

Product revenue was $177.7 million in 2010, up $11.6 million compared to 2009. The increase was primarily related to improved sales of IT hardware of $13.8 million, driven by higher spending by customers. This increase was partially offset by lower wireless equipment revenues due to lower subscriber activations and fewer handset upgrades.

Cost of services was $413.9 million in 2010, up $7.8 million, or 2%, compared to 2009. IT Services and Hardware and Data Center Colocation costs increased to support growth in their respective operations. Wireline network costs increased primarily to support growth in VoIP and Fioptics revenues. These increases were offset by decreases in Wireless network and roaming costs.

Cost of products sold was $190.6 million in 2010, an increase of $5.7 million from the prior year. Sales of telecommunications and IT hardware increased cost of products by $10.9 million in 2010, primarily offset by lower handset subsidies of $5.0 million compared to 2009.

SG&A expenses were $270.9 million in 2010 compared to $274.8 million in the prior year, a decrease of $3.9 million compared to 2009. This decrease was related to lower bad debt and advertising expenses, lower commissions, and decreased costs from third-party service providers. These were offset by higher payroll and employee related costs to support growing operations and the acquisition of CyrusOne in June 2010.

Depreciation and amortization was $179.5 million in 2010, up $14.6 million compared to 2009. Higher depreciation and amortization was incurred in 2010 due to tangible and intangible assets acquired with CyrusOne.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

Restructuring charges were $13.7 million in 2010 and $12.6 million in 2009. In both periods, restructuring activities consisted of actions to reduce operating costs and to integrate certain operations. Employee separation costs and special termination benefits were $8.7 million in 2010 and $12.6 million in 2009. Lease abandonment costs were $3.5 million and costs to terminate contracts in conforming the sales commission plans in our data center business were $1.4 million in 2010, with no such costs in 2009. In 2009, a curtailment gain was recognized due to changes in the management pension and postretirement plans.

Acquisition costs of $9.1 million in 2010 represent costs incurred due to the acquisition of CyrusOne. During 2009, the Company sold almost all of its owned wireless licenses for areas outside of its Cincinnati and Dayton, Ohio operating territories. These licenses, which were primarily for the Indianapolis, Indiana region, were sold for $6.0 million, resulting in a loss on sale of the spectrum assets of $4.8 million.

Interest expense increased to $185.2 million in 2010 compared to $130.7 million in 2009. The increase compared to the prior year is primarily attributable to higher debt balances to fund the acquisition of CyrusOne and higher interest rates on recently refinanced debt.

The loss on extinguishment of debt of $46.5 million in 2010 was due to the redemption of the Company’s 8 ³/₈% Senior Subordinated Notes due 2014 and the repayment of the Tranche B Term Loan. The loss on extinguishment of debt of $10.3 million for 2009 was primarily due to the redemption of the Company’s 7 ¹/₄% Senior Notes due 2013 and was partially offset by a gain on extinguishment of a portion of the Company’s 7 ¹/₄% Senior Notes due 2023 and Cincinnati Bell Telephone Notes at an average discount of 24%. See Note 7 to the Consolidated Financial Statements for further details.

Income tax expense decreased from $64.7 million in 2009 to $38.9 million in 2010 primarily due to lower pretax income and a $7.0 million tax benefit associated with a change in valuation allowance on state deferred tax assets that are expected to be utilized as a result of the CyrusOne acquisition. These decreases were partially offset by a $6.5 million charge related to tax matters associated with the refinancing of the 8 ³/₈% Subordinated Notes and an approximate $4 million charge related to a tax law change that now requires the application of federal income taxes against the retiree Medicare drug subsidy received by the Company.

Discussion of Operating Segment Results

The Company manages its business based upon products and service offerings. At December 31, 2011, we operated four business segments: Wireline, Wireless, Data Center Colocation, and IT Services and Hardware. Certain corporate administrative expenses have been allocated to our business segments based upon the nature of the expense and the relative size of the segment. Intercompany transactions between segments have been eliminated.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

Wireline

The Wireline segment provides local voice telephone service and custom calling features, and data services, including high-speed internet access, dedicated network access, ATM — Gig-E based data transport, and dial-up internet access to customers in southwestern Ohio, northern Kentucky, and southeastern Indiana through the operations of CBT, an ILEC in its operating territory of an approximate 25-mile radius of Cincinnati, Ohio. CBT’s network has full digital switching capability and can provide data transmission services to approximately 96% of its in-territory access lines via DSL.

Outside of the ILEC territory, the Wireline segment provides these services through CBET, which operates as a CLEC in the communities north of CBT’s operating territory including the Dayton, Ohio market. CBET provides voice and data services for residential and business customers on its own network and by purchasing unbundled network elements from the ILEC. The Wireline segment links the Cincinnati and Dayton, Ohio geographies through its SONET, which provides route diversity via two separate paths.

In 2011, the Company continued to expand its Fioptics product suite of services, which are fiber-based entertainment, high-speed internet and voice services. Fioptics now passes 134,000 addresses, about 20% of Greater Cincinnati, and has 39,600 Fioptics entertainment customers.

The Wireline segment also includes long distance, audio conferencing, other broadband services including private line and MPLS, and payphone services.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.



Wireline continued
							$ Change			% Change						$ Change			% Change
(dollars in millions, except for operating metrics)	2011			2010			2011 vs. 2010			2011 vs. 2010			2009			2010 vs. 2009			2010 vs. 2009
Revenue:
Voice - local service	$	280.3		$	311.9		$	(31.6	)	(10	)%		$	347.7		$	(35.8	)	(10	)%
Data	291.5			283.3			8.2			3	%		284.3			(1.0		)	0	%
Long distance and VoIP	111.3			104.4			6.9			7	%		97.1			7.3			8	%
Entertainment	26.6			16.7			9.9			59	%		7.7			9.0			117	%
Other	22.4			26.2			(3.8		)	(15	)%		26.3			(0.1		)	0	%
Total revenue	732.1			742.5			(10.4		)	(1	)%		763.1			(20.6		)	(3	)%
Operating costs and expenses:
Cost of services and products	270.0			256.8			13.2			5	%		251.6			5.2			2	%
Selling, general and administrative	126.7			140.1			(13.4		)	(10	)%		147.0			(6.9		)	(5	)%
Depreciation and amortization	102.4			103.9			(1.5		)	(1	)%		103.9			—			0	%
Restructuring charges	7.7			8.2			(0.5		)	(6	)%		12.6			(4.4		)	(35	)%
Curtailment loss (gain)	4.2			—			4.2			n/m			(7.6		)	7.6			n/m
Gain on sale of assets	(8.4		)	—			(8.4		)	n/m			—			—			n/m
Impairment of assets	1.0			—			1.0			n/m			—			—			n/m
Total operating costs and expenses	503.6			509.0			(5.4		)	(1	)%		507.5			1.5			0	%
Operating income	$	228.5		$	233.5		$	(5.0	)	(2	)%		$	255.6		$	(22.1	)	(9	)%
Operating margin	31.2		%	31.4		%				(0.2	)	pts	33.5		%				(2.1)		pts
Capital expenditures	$	112.6		$	98.6		$	14.0		14	%		$	133.0		$	(34.4	)	(26	)%
Metrics information (in thousands):
Local access lines	621.3			674.1			(52.8		)	(8	)%		723.5			(49.4		)	(7	)%
High-speed internet subscribers
DSL subscribers	218.0			228.9			(10.9		)	(5	)%		233.8			(4.9		)	(2	)%
Fioptics internet subscribers	39.3			27.2			12.1			44	%		13.8			13.4			97	%
	257.3			256.1			1.2			0	%		247.6			8.5			3	%
Long distance lines	447.4			482.8			(35.4		)	(7	)%		508.3			(25.5		)	(5	)%
Fioptics entertainment subscribers	39.6			28.1			11.5			41	%		15.2			12.9			85	%

2011 Compared to 2010

Revenues

Voice local service revenue includes local service, value added services, digital trunking, switched access, and information services. Voice local service revenue was $280.3 million in 2011, down $31.6 million, or 10%, compared to 2010. These revenues have declined primarily due to fewer local access lines in use. Access lines were 621,300 at December 31, 2011, down 52,800, or 8%, compared to a year earlier. The decline in access lines resulted from several factors, including customers electing to solely use wireless service in lieu of traditional local wireline service, Company-initiated disconnections of customers with credit problems, and customers electing to use service from other providers.

Data revenue consists of Fioptics high-speed internet access, DSL high-speed internet access, dial-up internet access, data transport, and LAN interconnection services. Data revenue was $291.5 million in 2011, up $8.2 million, or 3%, compared to 2010. Revenue from Fioptics high-speed internet service increased to $15.8 million in 2011, up from $10.2 million in the prior year. As of December 31, 2011, high-speed internet Fioptics customers were 39,300, which is 44% higher than a year ago. LAN service revenue also increased by $5.6 million on a year-over-year basis. Lower DSL revenue partially offset these increases. DSL subscribers of 218,000 at the end of 2011 decreased by 5% from 2010.

Long distance and VoIP revenue was $111.3 million in 2011, an increase of $6.9 million, or 7%, compared to 2010. In 2011, both audio conferencing and VoIP services increased due to a larger number of subscribers and higher usage. Partially offsetting this favorable trend, long distance residential revenue declined by $4.1 million in 2011. As of December 31, 2011,

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

long distance subscriber lines were 447,400, a 7% decrease compared to a year earlier. Long distance subscriber lines have declined as consumers opt to utilize wireless and VoIP services.

Entertainment revenue was $26.6 million in 2011, up $9.9 million, or 59%, compared to the prior year due to growth in Fioptics subscribers. As of December 31, 2011, Fioptics entertainment subscribers were 39,600, up 41% from a year ago. The Company continues to expand its Fioptics service area as there is strong consumer demand for this service.

Other revenue was $22.4 million in 2011, down $3.8 million compared to the prior year. The sale of the Company's home security monitoring business decreased revenues by $2.1 million in 2011. Fewer wire installation jobs also contributed to lower revenues compared to the prior year.

Costs and Expenses

Cost of services and products was $270.0 million in 2011, an increase of $13.2 million, or 5%, compared to 2010. Payroll related costs and contract services were up $6.6 million and $2.7 million, respectively, primarily due to overtime associated with the start-up of Fioptics IPTV, as well as higher volumes of repair work resulting from record rainfall in our operating territory. Network costs also increased by $6.0 million in 2011 compared to last year as a result of growth in audio conferencing, VoIP, and Fioptics services.

SG&A expenses were $126.7 million in 2011, down $13.4 million, or 10% compared to the prior year. Payroll and other employee related costs were down $10.1 million due to lower headcount. Contract services and advertising costs were down $2.8 million and $1.5 million, respectively, compared to 2010. Partially offsetting these favorable variances, legal and consulting costs and non-employee commissions were higher in 2011.

Depreciation and amortization was $102.4 million in 2011, which was down $1.5 million compared to the prior year.

Restructuring charges were $7.7 million in 2011 compared to $8.2 million in the prior year. The Company continues to manage the cost structure of this business. Employee separation costs were $3.5 million in 2011 and $4.9 million in 2010. Lease abandonment costs were $2.5 million and $3.3 million in 2011 and 2010, respectively. Contract termination costs were $1.7 million in 2011, with no such costs incurred in the prior year.

The sale of substantially all the assets associated with our home security monitoring business in 2011 resulted in a gain of $8.4 million. Curtailment losses of $4.2 million were recognized from the reduction of future pension benefits for certain bargained employees. Asset impairment losses were $1.0 million in 2011, with no such losses in 2010. Asset impairment losses arose from abandoned leasehold improvements related to vacated office space and the write-down to fair value of certain assets held for sale.

Capital Expenditures

Capital expenditures are incurred to maintain the wireline network, expand the Company's Fioptics product suite, and upgrade its DSL network. Capital expenditures were $112.6 million in 2011, up $14.0 million from 2010. Spending to expand the Company's Fioptics service area increased by $22.1 million from 2010 to 2011. At December 31, 2011, the Company's Fioptics service passes 134,000 units. The increased spending was offset by lower spending in the expanded VoIP service areas.

2010 Compared to 2009

Revenues

Voice local service revenue was $311.9 million in 2010, a decrease of 10% compared to the prior period. The decrease in revenue was driven by a decrease in the use of local access lines from the prior year. Access lines decreased by 49,400, or 7%.

Data revenue was $283.3 million in 2010, which was essentially flat compared to the same period in 2009. As of December 31, 2010, the Company had 27,200 high-speed internet Fioptics subscribers, which is a 13,400 subscriber, or 97%, increase, from the December 31, 2009 total of 13,800 subscribers. These increases were primarily offset by lower DSL revenue resulting from a decline in subscribers and average revenue per subscriber.

Long distance and VoIP revenue was $104.4 million in 2010, an increase of $7.3 million, or 8%, compared to 2009. The increase was primarily attributable to an increase in VoIP and audio conferencing services provided to additional subscribers. This increase was partially offset by a 5% decrease in long distance subscriber lines, which is consistent with the local voice access line loss.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

Entertainment revenue was $16.7 million in 2010, up $9.0 million, or 117%, compared to 2009. Fioptics entertainment revenue grew by $7.5 million compared to the same period in 2009. Fioptics entertainment subscribers totaled 28,100 at December 31, 2010, an increase of 85% compared to December 31, 2009. The increase in entertainment subscribers is related to expansions of the Fioptics network and high customer demand.

Other revenue was $26.2 million for 2010, substantially the same as 2009.

Costs and Expenses

Cost of services and products was $256.8 million, an increase of $5.2 million, or 2%, versus 2009. The increase was primarily driven by higher network costs to support growth in VoIP and Fioptics revenues, higher operating taxes and higher costs associated with employee healthcare benefits. These expenses were offset by a decrease in costs from lower wages and less pension and postretirement costs.

SG&A expenses were $140.1 million, a decrease of $6.9 million, or 5%, versus a year ago. The decrease was primarily due to a $4.1 million decrease in bad debt expense, decreases in costs from third-party service providers and lower advertising expenses.

Depreciation and amortization was $103.9 million in 2010, flat as compared to a year ago.

Restructuring charges in 2010 were $8.2 million, a decrease of $4.4 million compared to the prior year. Restructuring charges in 2010 were from employee separation obligations of $4.9 million and future lease costs on abandoned office space of $3.3 million. Restructuring expenses for 2009 resulted from employee separation obligations and amortization of pension and postretirement special termination benefits related to early retirement offers. A curtailment gain of $7.6 million was also recognized in 2009. See Notes 10 and 11 to the Consolidated Financial Statements for further information.

Capital Expenditures

Capital expenditures were $98.6 million in 2010, a decrease of $34.4 million, or 26%, compared to 2009. The decrease is primarily related to lower capital spending on the fiber network in 2010.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

Wireless

The Wireless segment provides advanced digital voice and data communications services through the operation of a regional wireless network in the Company’s licensed service territory, which surrounds Cincinnati and Dayton, Ohio and includes areas of northern Kentucky and southeastern Indiana. Although Wireless does not market to customers outside of its licensed service territory, it is able to provide service outside of this territory through roaming agreements with other wireless operators. The segment also sells wireless handset devices and related accessories to support its service business.



							$ Change			% Change						$ Change			% Change
(dollars in millions, except for operating metrics)	2011			2010			2011 vs. 2010			2011 vs. 2010			2009			2010 vs. 2009			2010 vs. 2009
Revenue:
Postpaid service	$	199.2		$	214.6		$	(15.4	)	(7	)%		$	228.1		$	(13.5	)	(6	)%
Prepaid service	53.2			54.6			(1.4		)	(3	)%		51.7			2.9			6	%
Equipment and other	25.2			20.0			5.2			26	%		27.2			(7.2		)	(26	)%
Total revenue	277.6			289.2			(11.6		)	(4	)%		307.0			(17.8		)	(6	)%
Operating costs and expenses:
Cost of services and products	134.2			137.4			(3.2		)	(2	)%		161.6			(24.2		)	(15	)%
Selling, general and administrative	55.2			61.1			(5.9		)	(10	)%		68.2			(7.1		)	(10	)%
Depreciation and amortization	33.5			33.4			0.1			0	%		39.4			(6.0		)	(15	)%
Restructuring charges	—			1.0			(1.0		)	n/m			—			1.0			n/m
Loss on sale of asset	—			—			—			n/m			4.8			(4.8		)	n/m
Impairment of goodwill	50.3			—			50.3			n/m			—			—			n/m
Impairment of assets, excluding goodwill	1.1			—			1.1			n/m			—			—			n/m
Total operating costs and expenses	274.3			232.9			41.4			18	%		274.0			(41.1		)	(15	)%
Operating income	$	3.3		$	56.3		$	(53.0	)	(94	)%		$	33.0		$	23.3		71	%
Operating margin	1.2		%	19.5		%				(18.3	)	pts	10.7		%				8.8		pts
Capital expenditures	$	17.6		$	11.7		$	5.9		50	%		$	34.9		$	(23.2	)	(66	)%
Metrics information:
Postpaid ARPU*	$	50.06		$	49.79		$	0.27		1	%		$	48.56		$	1.23		3	%
Prepaid ARPU*	$	28.58		$	29.58		$	(1.00	)	(3	)%		$	28.64		$	0.94		3	%
Postpaid subscribers (in thousands)	311.0			351.2			(40.2		)	(11	)%		379.1			(27.9		)	(7	)%
Prepaid subscribers (in thousands)	148.0			157.8			(9.8		)	(6	)%		154.0			3.8			2	%
Average postpaid churn	2.2		%	2.1		%				0.1		pts	2.2		%				(0.1	)	pts



*	The Company has presented certain information regarding monthly average revenue per user (“ARPU”) because the Company believes ARPU provides a useful measure of the operational performance of the wireless business. ARPU is calculated by dividing service revenue by the average subscriber base for the period.

2011 Compared to 2010

Revenue

Postpaid service revenue was $199.2 million in 2011, a decrease of $15.4 million, or 7%, compared to a year ago. The decrease in postpaid service revenue was driven by an 11% decrease in subscribers, and a decrease in voice minutes of use, partially offset by higher data usage. The Company believes it continued to lose subscribers in 2011 due in part to customer preference for competitor smartphones, such as the iPhone^TM. The Company continued to focus its marketing efforts on smartphones, which promote increased data usage and resulting data ARPU. At December 31, 2011, the Company had 106,000 postpaid smartphone subscribers compared to 96,000 postpaid smartphone subscribers at December 31, 2010, which lead to an

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

increase of data ARPU from $11.69 in 2010 to $14.54 in 2011. However, total postpaid ARPU remained steady as the decline in voice revenue per subscriber, due to fewer minutes of use, mostly offset the 24% increase in data ARPU.

Prepaid service revenue was $53.2 million in 2011, a decrease of $1.4 million compared to the prior year. Prepaid subscribers were 148,000 at December 31, 2011, a 6% decline from a year earlier, due to aggressive competitor promotions on prepaid service. In response to competitor promotions, the Company also promoted discounted rate plans, which resulted in a 3% decrease in prepaid ARPU compared to to the prior year.

Equipment and other revenue for 2011 increased $5.2 million to $25.2 million in 2011 primarily due to higher revenue per smartphone handset sales to consumers and increased sales to a wholesale distributor.

Costs and Expenses

Cost of services and products consists largely of network operation costs, interconnection expenses with other telecommunications providers, roaming expense (which is incurred for subscribers to use their handsets in the territories of other wireless service providers), and cost of handsets and accessories sold. These expenses decreased $3.2 million during 2011 versus the prior year period. This decrease was primarily attributable to lower handset subsidies and contract services compared to the prior year, which was partially offset by higher cost of goods sold due to the increase in equipment revenue and higher network operation costs resulting from increased smartphone penetration and data usage. Handset subsidies were lower in 2011 as holiday promotions were less extensive than the prior year.

SG&A decreased $5.9 million in 2011 compared to 2010, primarily due to a $2.8 million decrease in third-party service provider and payroll costs and a $2.6 million decrease in advertising and promotional expenses due to cost reduction initiatives.

Depreciation and amortization was $33.5 million in 2011, essentially flat compared to a year ago. In 2011, Wireless began amortizing its trademark license which added $1.5 million of amortization expense. The increase in amortization was offset by a decrease in depreciation on tangible assets.

In 2011, Wireless recognized a goodwill impairment loss of $50.3 million and asset impairment losses of $1.1 million. The goodwill impairment loss arose from declines in revenues and wireless subscribers. Asset impairments were recognized for canceled capital projects. In 2010, Wireless incurred a $1.0 million restructuring charge primarily for employee separation costs.

Capital Expenditures

Capital expenditures were $17.6 million in 2011, up $5.9 million compared to 2010. During 2011, Wireless deployed software upgrades and incurred additional fiber costs to begin its network upgrade to 4G using HSPA+ technology.

2010 Compared to 2009

Revenue

Postpaid service revenue was $214.6 million for the full year 2010, a decrease of $13.5 million, or 6%, compared to 2009. The decrease in postpaid service revenue was primarily driven by a 7% decrease in subscribers. Postpaid ARPU was $49.79, up $1.23, or 3%, compared to the prior year. Higher data usage substantially offset a decline in voice usage. At December 31, 2010, the Company had 96,000 postpaid smartphone subscribers compared to 83,000 postpaid smartphone subscribers at December 31, 2009, a 16% increase from the same period a year ago. The increase in smartphone subscribers increased data usage, and the Company earned $11.69 of data ARPU in 2010 compared to $10.00 in 2009.

Prepaid service revenue was $54.6 million in 2010, an increase of $2.9 million, or 6%, compared to the same period in 2009. Prepaid subscribers were 157,800 at December 31, 2010, up 2% from a year earlier. The increase in revenue was a result of the increase in subscribers and higher value rate plans, which contributed to an increase in ARPU of $0.94 compared to 2009.

Equipment and other revenue in 2010 was $20.0 million, down $7.2 million compared to 2009. The decrease in equipment revenue of $2.9 million was related to lower subscriber activations and less handset upgrades. Other revenue decreased $4.3 million due to lower tower rent revenue resulting from the sale of wireless towers in December 2009.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

Costs and Expenses

Cost of services and products was $137.4 million, a decrease of $24.2 million, or 15%, compared to 2009. The decrease was primarily attributable to a $10.1 million decrease in roaming costs due to renegotiated rates and lower minutes of use, lower handset subsidies of $5.0 million primarily due to lower activations and less handset upgrades, and a $4.3 million decrease in third-party service provider and internal labor costs due to outsourcing and cost reduction initiatives. In addition, the sale of wireless towers in December 2009 also contributed to lower costs in 2010.

SG&A expenses were $61.1 million in 2010, a decrease of $7.1 million, or 10%, compared to 2009. This decrease was primarily due to a $2.9 million decrease in bad debt expense, a $2.9 million decrease in third-party service provider and internal labor costs due to outsourcing and cost reduction initiatives, as well as lower commissions due to decreased revenues.

Depreciation and amortization was $33.4 million for 2010, a $6.0 million decrease as compared to 2009. This decrease was primarily associated with the sale of wireless towers in the fourth quarter of 2009. Amortization expense decreased by $0.5 million from the prior year due to the Company’s accelerated amortization methodology.

In the fourth quarter of 2010, Wireless incurred a $1.0 million restructuring charge primarily for employee separation costs.

During 2009, the Company sold almost all of its owned wireless licenses for areas outside of its Cincinnati and Dayton, Ohio operating territories. These licenses, which were primarily for the Indianapolis, Indiana region, were sold for $6.0 million, resulting in a loss on sale of the spectrum assets of $4.8 million.

Capital Expenditures

Capital expenditures were $11.7 million in 2010, a decrease of $23.2 million, or 66%, compared to 2009, primarily related to lower network spending.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

Data Center Colocation

The Data Center Colocation segment provides large enterprise customers with outsourced data center operations, including all necessary redundancy, security, power, cooling, and interconnection. On June 11, 2010, the Company acquired CyrusOne, a data center colocation provider based in Texas, for approximately $526 million, net of cash acquired. The Company funded the purchase with borrowings and available cash. See Note 3 to the Consolidated Financial Statements for further information.



							$ Change			% Change						$ Change		% Change
(dollars in millions, except for operating metrics)	2011			2010			2011 vs. 2010			2011 vs. 2010			2009			2010 vs. 2009		2010 vs. 2009
Revenue	$	184.7		$	125.3		$	59.4		47	%		$	71.8		$	53.5	75	%
Operating costs and expenses:
Cost of services	59.7			39.2			20.5			52	%		30.1			9.1		30	%
Selling, general and administrative	23.8			15.9			7.9			50	%		9.7			6.2		64	%
Depreciation and amortization	54.8			34.6			20.2			58	%		15.0			19.6		131	%
Restructuring charges	—			1.4			(1.4		)	n/m			—			1.4		n/m
Total operating costs and expenses	138.3			91.1			47.2			52	%		54.8			36.3		66	%
Operating income	$	46.4		$	34.2		$	12.2		36	%		$	17.0		$	17.2	101	%
Operating margin	25.1		%	27.3		%				(2.2	)	pts	23.7		%			3.6		pts
Capital expenditures	$	118.5		$	31.1		$	87.4		n/m			$	23.0		$	8.1	35	%
Metrics information:
Data center capacity (in square feet)	763,000			639,000			124,000			19	%		446,000			193,000		43	%
Utilization rate*	88		%	88		%				—		pts	87		%			1		pt



	*	The utilization rate is calculated by dividing data center square footage that is committed contractually to customers, if built, by total data center square footage. Some data center square footage that is committed contractually may not yet be billing to the customer.
	*

2011 Compared to 2010

Revenue

Data center service revenue consists of recurring colocation rents and nonrecurring revenue for installation of customer equipment. Revenue increased $59.4 million in 2011 as compared to 2010 primarily due to the acquisition of CyrusOne in June 2010 and new business earned in 2011. Changes to the presentation of certain customers' utility billings in 2011 also added $7.6 million to revenues for the year.

The Data Center Colocation business had capacity of 763,000 square feet of data center space at December 31, 2011, up 19% from a year earlier. Data center space was added in the U.S., England, and Singapore. The utilization rate of 88% was consistent with the prior year. Utilized square feet increased from 563,000 square feet at the end of 2010 to 673,000 square feet at the end of 2011, a 20% increase.

Costs and Expenses

Cost of services increased in 2011 compared to 2010 by $20.5 million due to growth in data center revenues and the acquisition of CyrusOne in June 2010. CyrusOne's cost of services increased by $13.4 million compared to the prior year, due to a full year of these costs in 2011 as well as higher operating costs associated with expansion of data center facilities including payroll, utilities and rent. The change in the presentation of certain customers' utility billings, described above, also increased cost of services by $7.6 million.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

SG&A costs increased by $7.9 million to $23.8 million in 2011. SG&A costs increased as a result of CyrusOne expenses being included for the full year in 2011. In addition, legal and consulting costs increased in 2011 related to start-up costs associated with new locations, and advertising costs increased as CyrusOne enhanced its internet marketing and commenced a national branding campaign.

The $20.2 million increase in depreciation and amortization expense for 2011 compared to 2010 was primarily due to the assets acquired with CyrusOne and additional assets placed in service to increase data center capacity.

A restructuring charge of $1.4 million was incurred in 2010 for payments to be made in order to conform the Cincinnati-based operation’s commission incentive program to the CyrusOne program.

Capital Expenditures

Capital expenditures were $118.5 million in 2011, an increase of $87.4 million from the prior year. During 2011, the Data Center Colocation business completed construction on 116,000 square feet of space in the U.S., 5,000 square feet in London, England, and 3,000 square feet in Singapore. In addition, the Company purchased land in Phoenix, Arizona, and land and a building shell in San Antonio, Texas. The Company intends to continue to pursue additional customers and growth in its data center business, and is prepared to commit additional resources, including resources for capital expenditures, acquisitions and working capital both within and outside of its traditional operating territory to support this growth.

2010 Compared to 2009

Revenue

Data center revenue in 2010 was $125.3 million, an increase of $53.5 million, or 75%, compared to the same period in 2009. The increase in revenue was primarily related to the acquisition of CyrusOne in June 2010, which had revenue of $45.0 million since its acquisition. Additionally, the Cincinnati-based data center operations generated higher revenue in 2010 as compared to 2009 due to a full year of revenue from its Lebanon, Ohio facility which was opened at the end of the first quarter of 2009, and from a 12,000 square feet increase in its utilized data center space at December 31, 2010 compared to the prior year end.

The Data Center Colocation business had 639,000 square feet of data center space at December 31, 2010, up 43% from a year earlier, primarily from the acquisition of CyrusOne in June 2010. At December 31, 2010 the utilization rate of the Company's data center facilities was 88%, up slightly from the previous year.

Costs and Expenses

Cost of services was $39.2 million for 2010, up $9.1 million, or 30%, compared to 2009. The increase is primarily related to the acquisition of CyrusOne and expansion of the Cincinnati-based operations. CyrusOne's cost of services was $11.8 million in 2010 since its acquisition.

SG&A expenses were $15.9 million for 2010, up $6.2 million, or 64%, versus the prior year. The increase is primarily related to the acquisition of CyrusOne. CyrusOne's SG&A costs were $5.6 million since its acquisition.

The increase in depreciation and amortization expense for 2010 compared to 2009 was primarily due to the assets acquired from the CyrusOne acquisition. Depreciation and amortization expense for CyrusOne was $8.5 million and $8.1 million, respectively, in 2010. A restructuring charge of $1.4 million was incurred in 2010 to terminate a sales commission plan and conform the incentive program across all data center operations.

Capital Expenditures

Capital expenditures were $31.1 million in 2010, an increase of $8.1 million, or 35%, compared to 2009. An increase in capital expenditures was undertaken to expand the acquired CyrusOne data centers.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

IT Services and Hardware

The IT Services and Hardware segment provides a full range of managed IT solutions, including managed infrastructure services, IT and telephony equipment sales, and professional IT staffing services. These services and products are provided in multiple geographic areas through the Company’s subsidiaries, CBTS, CBTS Canada Inc., CBTS Software LLC, and Cincinnati Bell Technology Solutions UK Limited. By offering a full range of equipment and outsourced services in conjunction with the Company’s wireline network services, the IT Services and Hardware segment provides end-to-end IT and telecommunications infrastructure management designed to reduce cost and mitigate risk while optimizing performance for its customers.



							$ Change			% Change						$ Change			% Change
(dollars in millions)	2011			2010			2011 vs. 2010			2011 vs. 2010			2009			2010 vs. 2009			2010 vs. 2009
Revenue:
Telecom and IT equipment distribution	$	206.0		$174.9			$	31.1		18	%		$	161.1		$	13.8		9	%
Managed services	64.7			55.1			9.6			17	%		49.4			5.7			12	%
Professional services	29.8			24.7			5.1			21	%		20.8			3.9			19	%
Total revenue	300.5			254.7			45.8			18	%		231.3			23.4			10	%
Operating costs and expenses:
Cost of services and products	243.0			202.6			40.4			20	%		182.1			20.5			11	%
Selling, general and administrative	37.4			37.7			(0.3		)	(1	)%		32.3			5.4			17	%
Depreciation and amortization	8.4			7.3			1.1			15	%		6.2			1.1			18	%
Restructuring charges	1.9			2.8			(0.9		)	(32	)%		—			2.8			n/m
Total operating costs and expenses	290.7			250.4			40.3			16	%		220.6			29.8			14	%
Operating income	$	9.8		$	4.3		$	5.5		128	%		$	10.7		$	(6.4	)	(60	)%
Operating margin	3.3		%	1.7		%				1.6		pts	4.6		%				(2.9)		pts
Capital expenditures	$	6.8		$	8.3		$	(1.5	)	(18	)%		$	3.8		$	4.5		118	%

2011 Compared to 2010

Revenue

Revenue from telecom and IT equipment distribution represents the sale, installation, and maintenance of major, branded IT and telephony equipment. Telecom and IT equipment distribution revenue was $206.0 million in 2011, an increase of $31.1 million, or 18%, compared to 2010. The increase in 2011 versus 2010 is primarily attributable to higher equipment sales arising from increased capital spending by business customers.

Managed services revenue consists of managed VoIP solutions and IT services that include network management, electronic data storage, disaster recovery and data security management. In 2011, managed services revenue was $64.7 million, an increase of $9.6 million, or 17% ,compared to the same period a year ago. Increased managed services provided to one of the Company's largest customers accounted for the higher revenues.

Professional services revenue consists of long-term and short-term IT outsourcing and consulting engagements and was $29.8 million for 2011, an increase of $5.1 million, or 21%, from a year ago. Increased demand for professional services from existing customers in 2011 compared to the prior year resulted in IT Services and Hardware expanding its portfolio of IT professionals.

Costs and Expenses

Cost of services and products was $243.0 million in 2011, an increase of $40.4 million, or 20%, compared to 2010. Cost of equipment sold increased $25.1 million as a result of the higher revenue from telecom and IT equipment distribution. Additionally, increased demand for managed and professional services drove an increase in payroll and payroll related costs and contract service expenses from the prior year of $13.3 million.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

SG&A expenses were $37.4 million in 2011, a decrease of $0.3 million, or 1%, from the prior year. SG&A was relatively flat despite higher revenues due to cost reduction initiatives.

The $1.1 million increase in depreciation and amortization expense for 2011 compared to 2010 was primarily due to assets placed in service to support the expansion of managed services and professional services projects.

Restructuring charges related to employee separation obligations of $1.9 million and $2.8 million were recognized in 2011 and 2010, respectively. The consolidation of certain products and the continued integration of certain functions into the Wireline segment led to these charges.

Capital Expenditures

Capital expenditures were $6.8 million in 2011 compared to $8.3 million in 2010. Capital expenditures were higher in 2010 due to the start-up of a higher number of new managed service projects.

2010 Compared to 2009

Revenue

Revenue from telecom and IT equipment distribution was $174.9 million in 2010, an increase of $13.8 million, or 9%, compared to 2009. The increase in 2010 versus 2009 was primarily attributable to higher hardware sales and increased capital spending by business customers from the prior year as a result of the improving economy in 2010.

In 2010, managed services revenue was $55.1 million, an increase of $5.7 million, or 12%, compared to the same period a year ago. The increase versus 2009 was primarily from a $5.2 million increase in services provided to one of the Company's largest customers.

Professional services revenue was $24.7 million for 2010, an increase of $3.9 million, or 19%, from a year ago, as the Company continued to expand its portfolio of IT professionals to grow these outsourcing and consulting engagements.

Costs and Expenses

Cost of services and products was $202.6 million in 2010, an increase of $20.5 million, or 11%, compared to 2009. The increase was related to higher telecom and equipment distribution revenue and higher payroll related costs to support the growth in managed services and professional services revenues.

SG&A expenses were $37.7 million in 2010, an increase of $5.4 million, or 17%, from the prior year. The increase in 2010 was due to an increase of $6.1 million in payroll and employee related costs to support the growing operations.

The increase in depreciation and amortization expense for 2010 compared to 2009 was primarily due to the increased capital expenditures to support the expansion of managed services and professional services projects.

During 2010, the IT Services and Hardware segment incurred employee separation charges of $2.8 million associated with the integration of certain functions with the Wireline segment.

Capital Expenditures

Capital expenditures were $8.3 million in 2010, up $4.5 million compared to 2009, due to higher spending on new capital projects to begin new managed service projects.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

Corporate

Corporate is comprised primarily of general and administrative costs that have not been allocated to the business segments. Corporate costs totaled $28.5 million in 2011, $29.0 million in 2010, and $20.8 million in 2009.

2011 Compared to 2010

Corporate costs decreased by $0.5 million compared to the prior year. Expenses decreased as a result of lower acquisition costs, the release of a previously established indemnification liability of $1.2 million, and cost savings for third-party services of $0.5 million. Acquisition costs were $2.6 million in 2011, down from $9.1 million in 2010 associated with the acquisition of CyrusOne. In 2011, acquisition opportunities were pursued but none were completed. Mostly offsetting these decreases were increases in payroll and benefit related costs of $5.4 million and restructuring charges of $2.3 million. Payroll and benefit related costs increased due to higher headcount, incentive compensation, long-term disability obligations and stock-based compensation expense.

2010 Compared to 2009

The increase in corporate costs of $8.2 million in 2010 from 2009 was primarily due to $9.1 million of acquisition costs on the purchase of CyrusOne and higher payroll and related costs. These cost increases were partially offset by lower stock-based compensation costs. The mark-to-market impact for the cash-payment compensation plans that are indexed to the change in the Company’s stock price was $1.0 million of income in 2010.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

Financial Condition, Liquidity, and Capital Resources

Capital Investment, Resources and Liquidity

Short-term view

Our primary source of cash is generated by operations. In 2011, 2010 and 2009, we generated $289.9 million, $300.0 million, and $265.6 million, respectively, of cash flows from operations. We expect cash flows from operations to be our primary source of cash in 2012. As of December 31, 2011, we also had $363.3 million of short-term liquidity, comprised of $73.7 million of cash and cash equivalents, $210.0 million of undrawn capacity on the Corporate credit facility, and $79.6 million of unused capacity on the Receivables Facility.

Our primary uses of cash are capital expenditures and debt service. In 2011, 2010, and 2009, capital expenditures were $255.5 million, $149.7 million, and $195.1 million, respectively. The higher capital expenditures in 2011 resulted from increased spending on new data centers. The Company expects continued success with its data center operations, which could result in 2012 capital expenditures of $300 million to $400 million. In 2011, 2010, and 2009, debt repayments were $11.5 million, $1,554.5 million, and $506.5 million, respectively, and interest payments were $211.8 million, $172.4 million and $118.8 million, respectively. In 2010 and 2009, debt repayments refinanced and extended maturities on existing debt and, to a lesser extent, repurchased debt at attractive prices prior to their scheduled maturities. Interest payments increased in 2011 based on increased debt levels to fund the CyrusOne acquisition and higher interest rates upon debt refinancing. In 2012, our contractual debt maturities, including capital lease obligations, are $13.0 million and associated contractual interest payments are expected to be approximately $209 million.

To a lesser extent, cash is also utilized to pay preferred stock dividends, to repurchase shares of our common stock, and to fund pension obligations. Dividends paid on preferred stock were $10.4 million in each of 2011, 2010 and 2009. We do not currently pay dividends on our common shares, nor do we plan to pay dividends on these shares in 2012. In 2011, 2010, and 2009, cash used to repurchase common shares was $10.4 million, $10.0 million and $73.2 million, respectively. As of December 31, 2011, management has authority to repurchase additional common shares with a value up to $129.2 million under the most recent plan approved by the Board of Directors. This plan does not have a stated maturity date. Management may purchase additional shares in the future, to the extent that cash is available and management believes the share price offers an attractive value. Contributions to our qualified pension plans for 2012 are expected to be $30 million.

The Company’s Receivables Facility, which had $79.6 million in available borrowing capacity at December 31, 2011, is subject to renewal annually. While we expect to continue to renew this facility, we would be required to use cash, our Corporate revolving credit facility, or other sources to repay any outstanding balance on the Receivables Facility, if it were not renewed. At December 31, 2011, there were no borrowings outstanding under this facility.

Management believes that cash on hand, cash generated from operations, and cash from its credit facilities will be adequate to meet the Company's investing and financing needs for 2012.

Long-term view, including debt covenants

As of December 31, 2011, the Company had $2.5 billion of outstanding indebtedness and an accumulated deficit of $3.2 billion. A significant amount of indebtedness was previously incurred from the purchase and operation of a national broadband business, which was sold in 2003.

In addition to the uses of cash described in the Short-term view section above, the Company has significant long-term debt maturities that come due after 2012. Contractual debt maturities, including capital lease obligations, are $18.9 million in 2013, $6.3 million in 2014, $253.2 million in 2015, $6.0 million in 2016 and $2.2 billion thereafter. In addition, we have ongoing obligations to fund our qualified pension plans. Based on current legislation and current actuarial assumptions, we estimate these contributions to approximate $200 million over the period from 2012 to 2019. It is also possible that we will use a portion of our cash flows for de-leveraging in the future, including discretionary, opportunistic repurchases of debt prior to their scheduled maturities.

The Corporate revolving credit facility, which expires in June 2014, contains financial covenants that require us to maintain certain leverage and interest coverage ratios, and limits our cumulative spending on capital expenditures. For the period from October 1, 2011 to June 11, 2013, capital expenditures are permitted as long as they do not exceed $1.0 billion in the aggregate. The facility also has certain covenants, which, among other things, limit our ability to incur additional debt or liens, pay dividends, repurchase Company common stock, sell, transfer, lease, or dispose of assets, and make investments or merge with another company. If the Company were to violate any of its covenants and were unable to obtain a waiver, it would be

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

considered a default. If the Company were in default under its credit facility, no additional borrowings under the credit facility would be available until the default was waived or cured. The Company is in compliance and expects to remain in compliance with its Corporate credit facility covenants.

Various issuances of the Company’s public debt, which include the 7% Senior Notes due 2015, the 8 ¹/₄% Senior Notes due 2017, the 8 ³/₄% Senior Subordinated Notes due 2018, and the 8 ³/₈% Senior Notes due 2020, contain covenants that, among other things, limit the Company’s ability to incur additional debt or liens, pay dividends or make other restricted payments, sell, transfer, lease, or dispose of assets and make investments or merge with another company. The Company is in compliance and expects to remain in compliance with its public debt indentures.

The Company’s most restrictive covenants are generally included in its Corporate credit facilities. In order to continue to have access to the amounts available to it under the Corporate revolving credit facility, the Company must remain in compliance with all covenants. The following table presents the calculation of the most restrictive debt covenant, the Consolidated Total Leverage Ratio, as of and for the year ended December 31, 2011:



(dollars in millions)
Consolidated Total Leverage Ratio as of December 31, 2011	4.75
Maximum ratio permitted for compliance	6.00
Consolidated Funded Indebtedness additional availability	$	659.9
Consolidated EBITDA clearance over compliance threshold	$	110.0

Definitions and components of this calculation are detailed in our credit agreement and can be found in the Company's Form 8-K filed June 11, 2010 and Form 8-K filed on November 3, 2011.

In various issuances of the Company’s public debt indentures, a financial covenant exists that permits the incurrence of additional Indebtedness up to a 4:00 to 1:00 Consolidated Adjusted Senior Debt to EBITDA ratio (as defined by the individual indentures). Once this ratio exceeds 4:00 to 1:00, the Company is not in default; however, additional Indebtedness may only be incurred in specified permitted baskets, including a Credit Agreement basket providing full access to the Corporate revolving credit facility. Also, the Company’s ability to make Restricted Payments (as defined by the individual indentures) would be limited, including common stock dividend payments or repurchasing outstanding Company shares. As of December 31, 2011, the Company was below the 4:00 to 1:00 Consolidated Adjusted Senior Debt to EBITDA ratio. In addition, the Company had in excess of $1.2 billion available in its restricted payment basket as of December 31, 2011. If the Company is under the 4:00 to 1:00 ratio on a proforma basis, the Company may use this basket to make restricted payments, including share repurchases or dividends, and/or the Company may designate one or more of its subsidiaries as Unrestricted (as defined in the various indentures) such that any Unrestricted Subsidiary would generally not be subject to the restrictions of these various indentures. However, certain provisions which govern the Company's relationship with Unrestricted Subsidiaries would begin to apply.

Management believes that cash on hand, operating cash flows, its revolving credit and accounts receivable facilities, and the expectation that the Company will continue to have access to capital markets to refinance debt and other obligations as they mature and come due, should allow the Company to meet its cash requirements for the foreseeable future.

Cash Flows

Cash flows from operating activities

The Company's primary source of funds continues to be cash generated from operations. Cash provided by operating activities during 2011 was $289.9 million, a decrease of $10.1 million compared to $300.0 million generated during 2010. This decrease included an additional $39.4 million of interest payments and $18.2 million of higher pension and postretirement payments, partially offset by favorable changes in operating assets and liabilities. Higher average outstanding debt, resulting from the CyrusOne acquisition in 2010, and higher interest rates on debt refinancings, led to the higher interest payments in 2011.

Cash provided by operating activities increased $34.4 million in 2010 compared to the $265.6 million provided by operating activities in 2009. This increase was driven by larger contributions to our pension and postretirement plans and medical trust in 2009. In 2009, cash contributions to our pension and postretirement plans were $58.4 million and a one-time prepayment of $24.2 million was made to the medical trust for active employees. These increases were partially offset by higher interest payments of $40.4 million as result of higher debt balances for the CyrusOne acquisition and higher interest rates on debt refinancings, and $13.2 million received in 2009 related to the settlement and termination of interest rate swaps in 2009.

Table of Contents



Form 10-K Part II		Cincinnati Bell Inc.

Cash flows from investing activities

Cash flows used in investing activities were $244.7 million in 2011 compared to $675.5 million in 2010 and $93.8 million in 2009. Capital expenditures were $255.5 million for 2011, which was $105.8 million higher than 2010 as a result of the continued expansion of our data center operations and Fioptics network. Capital expenditures were $45.4 million lower for 2010 versus 2009 due to decreased Wireless and Wireline network spending.

In 2011, the sale of substantially all of the home security monitoring business assets provided cash of $11.5 million, and in 2009, we sold substantially all of our wireless towers for $99.9 million and sold almost all of our wireless licenses for areas outside of the Cincinnati and Dayton, Ohio operating territories for $6.0 million. In June 2010, the Company used cash of approximately $526 million to acquire CyrusOne.

Cash flows from financing activities

Cash flows utilized for financing activities were $48.8 million in 2011. Cash was used to pay $10.4 million of preferred stock dividends, repurchase 3.4 million shares of common stock for $10.4 million, repay $11.5 million of long-term debt, and settle $16.0 million of other financing obligations.

Cash flows provided by financing activities for 2010 were $429.8 million. During 2010, the Company issued $2.1 billion of debt consisting of $625 million of 8 ³/₄% Senior Subordinated Notes due 2018, a $760 million secured term loan credit facility due 2017, and $775 million of 8 ³/₈% Senior Notes due 2020. The net proceeds from these borrowings were used to redeem the $560 million of outstanding 8 ³/₈% Senior Subordinated Notes due 2014, repay the Company's previous credit facility of $204.3 million, fund the acquisition of CyrusOne, repay the secured term loan facility totaling $756.2 million and to pay debt issuance fees and expenses. The Company paid $42.6 million of debt issuance costs related to the various issuances of these instruments in 2010. Also, during 2010, the Company repaid $85.9 million of borrowings under the Receivables Facility, repurchased approximately 4 million shares of common stock for $10.0 million, and paid $10.4 million of preferred stock dividends.

During 2009, cash flows used in financing activities were $155.5 million. The Company issued $500 million of 8 ¹/₄% Senior Notes and the net proceeds were used in part to redeem the outstanding 7 ¹/₄% Senior Notes due 2013 of $439.9 million plus accrued and unpaid interest and related call premium. The Company also purchased and extinguished $32.5 million of the Cincinnati Bell Telephone Notes and the 7 ¹/ ₄% Senior Notes due 2023 at an average discount of 24%. The Company paid $15.3 million of debt issuance costs related to the issuance of the 8 ¹/₄% Senior Notes and to amend and extend the term of the Corporate revolving credit facility. In 2009, the Company also repurchased $73.2 million of the Company’s common stock. Borrowings under the Corporate credit and receivables facilities with initial maturities less than 90 days decreased $42.1 million in 2009. Also, the Company paid preferred stock dividends of $10.4 million in 2009.