On June 20,2014, we issued an updated research report on CenturyLink, Inc. (CTL).
The company’s top line duly surpassed the Zacks Consensus Estimate and increased year over year in the first quarter of 2014. On the other hand, while earnings surpassed expectations, they significantly deteriorated from the year-ago quarter number. Currently, the Zacks Consensus Estimate for second quarter earnings is pegged at 64 cents per share, representing an annualized decline of 6.81%.
CenturyLink redesigned its operating segments to strengthen its grip over the market and remain fully committed to wholesale, consumer and hosting customers. The company, over the last few years, has been witnessing a slow rate of revenue decline.In 2013, the company’s core revenue trend recorded a narrower decline of 1.3% compared to 2.3% in 2012. In 2014, the company expects this trend to continue, arresting core revenue decline from a negative 1.2% to flat, buoyed by strategic revenues, improvement in broadband and Prism TV sales as well as high bandwidth data and hosting services. For the second quarter, the company projects total operating revenue in the range of $4.48–$4.53 billion and core revenues in the $4.07–$4.12 billion band.
CenturyLink is expected to achieve this target on synergies from long-standing ties with clients, bundled integrated services, launch of new and attractive services, consistent technology upgrades, infrastructure enhancement, better usage of networks and profitable collaborations. The company is also benefiting from its continuous investments in Product portfolio, which places it as an integrated end-to-end solution provider to various businesses. Centurylink’s Prism TV service is performing well and is expected to compensate for the revenue loss due to reduction of single play voice customers. CenturyLink remains committed to its ambition of making Prism TV service (catering to 200,000 customers at present) available to several new markets and adding 300,000 subscribers in 2014.
On the flip side, CenturyLink’s core local phone business has dwindled significantly, which is evident from the consistent decline in access lines on an organic basis. This is primarily due to the rapid substitution of traditional wireline telephone services by wireless and other competitive offerings and lower long distance minutes of use.In addition to large telecommunications providers, the company faces intense competition from cable TV operators and other wireless companies which aggressively offer traditional voice service over their networks. Improvements in the quality of VoIP (Voice over IP) services have enabled cable TV, Internet and telephone companies to offer services at attractive price points.
The company continues to experience a decline in subsidy payments received under the Federal Universal Service Fund or USF (provides telecom funding for lower income and rural consumer coverage), which represents an important source of its network access revenues. The Federal Communications Commission (:FCC) has reformed its USF and intercarrier compensation (fees that carriers pay each other when they connect telephone calls) rules. It has also highlighted its efforts to expand high-speed Internet services to rural areas over the next six years (2012–2018). It will reduce access and compensation rates charged by CenturyLink over the next six years, resulting in significant decline in the company’s access revenues.
CenturyLink currently has a Zacks Rank #3 (Hold).
Stocks that Warrant a Look
Better ranked stocks in this sector include Inteliquent, Inc. (IQNT), RF Micro Devices Inc. (RFMD) and Ruckus Wireless, Inc. (RKUS). While Inteliquent and RF Micro Devices sport a Zacks Rank #1 (Strong Buy), Ruckus Wireless has a Zacks Rank #2 (Buy).