CenturyLink Tops Q2 Earnings, Lags Revs

Zacks

CenturyLink Inc. (CTL) reported mixed financial results for the second quarter of 2013. The results were influenced by well performing broadband, Prism TV and data hosting units, supported by growing demand from business customers for high bandwidth data service and low operating expenses. These were partially offset by decreased legacy service revenues, which were impacted by access line loss and lower access revenues.

The company posted quarterly adjusted earnings of 69 cents per share, beating the Zacks Consensus Estimate of 67 cents. Comparing with the prior-year quarter, the results improved 6.2% from 65 cents.

Quarterly revenues of $4,525 million were marginally below the Zacks Consensus Estimate of $4,530 million. Revenues fell 1.9% from $4,612 million in the second quarter of 2012.

Segment Results

During the previous quarter, CenturyLink restructured its operating segments into four reporting units – Consumer, Business, Wholesale and Data Hosting services.

Consumer revenues declined 3.0% year over year to $1,494 million in the second quarter. The legacy business was hampered by the impact of Access Recovery Charges. This was mainly responsible for the decline. The segment registered Prism TV subscriber growth of over 12,200.

Business revenues were $1,525 million in the second quarter, down by 0.8% from second- quarter 2012. The company’s strength in high-bandwidth offerings were weakened by declining legacy services revenues.

The Wholesale segment generated revenues of $910 million in the second quarter, down 3.8% from the prior-year quarter. The drop was due to reduced access rates and lower long distance and switched access minutes of uses. The company completed over 1,150 fiber builds in the quarter and is on track to cover 4,000 to 5,000 fiber builds throughout the year.

Data Hosting revenues increased 7.4% year over year to $347 million, driven by growth in managed hosting along with colocation services.

Subscribers

At the end of the second quarter, total access lines were 13.331 million compared with 14.149 million in the year-earlier period. CenturyLink lost nearly 8,400 high-speed Internet customers during the quarter, bringing the total to 5.909 million (up 2.5% year over year).

Liquidity

CenturyLink exited the quarter with $214 million of cash and cash equivalents compared with $211 million at the end of 2012. Long-term debt increased to $20,283 million from $19,400 million at 2012 end. The company generated operating cash flow of $1,858 million in the quarter, while free cash flow was $703 million.

As of Aug 6, the company bought back 29.0 million shares for approximately $1 billion under the authorized new share repurchase program.

Guidance

For the third quarter of 2013, the company expects earnings and operating revenues of 59 cents to 64 cents and $4.50 billion to $4.55 billion, respectively. Operating cash flows are expected between $1.79 -$1.83 billion.

For full-year 2013, CenturyLink expects revenues of $18.05-$18.20 billion, reflecting a drop of 1% to 1.8% from the last year. Adjusted EPS is expected in the range of $2.63 to $2.73. Operating cash flows will likely be $7.35 billion to $7.50 billion, while capital expenditure is expected to be about $2.9 billion to $3.0 billion.

Other Stocks

Another telecom company, Frontier Communications (FTR), reported second-quarter results on Aug 7, 2013, after the market closed. The company’s adjusted earnings of 6 cents were in line with the Zacks Consensus Estimate of 6 cents.

Our Analysis

CenturyLink – which has business tie-ups with Verzion Communications Inc. (VZ) – has a Zacks Rank #3 (Hold).

With a reformed operating base, we expect the company to perform impressively in the coming months backed by broadband expansion, completion of fiber builds, better cloud computing services and the launch of Prism TV in new markets.

However, stiff competition from low-cost telecom operators like LEAP Wireless International Inc. (LEAP), deteriorating legacy voice and access revenues, regulatory issues and constant need for technology upgrades may impact the company’s operating performance.

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