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CenturyLink Inc. (CTL - Analyst Report) posted third quarter 2013 adjusted earnings of 63 cents per share, in line with the Zacks Consensus Estimate. Comparing with the prior-year quarter, the results dropped 4.5% from 66 cents.

Quarterly revenues of $4,515 million marginally beat the Zacks Consensus Estimate of $4,509 million. Revenues fell 1.2% from $4,571 million in the third quarter of 2012.

Segment Results

Consumer revenues declined 2.1% year over year to $1,503 million in the third quarter. The legacy business was hammered by increased Access Recovery Charges.  However, strategic revenues remain high based on high-speed Internet, Prism TV subscriber addition and rate hikes on selected services. This was mainly responsible for the decline. The segment registered Prism TV subscriber growth of over 17,000.

Business revenues were $1,544 million, flat year over year. The company’s strength in high-bandwidth offerings were weakened by declining legacy services and data integration revenues.

Wholesale segment generated revenues of $878 million, down 3.5% 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 1,200 fiber builds in the quarter and is on track to cover 3,500–4,000, which is lower than the previous estimate of 4,000 to 5,000 fiber builds throughout the year given contraction delays.

Data Hosting revenues increased 4.6% year over year to $342 million, driven by growth in managed hosting along with colocation service revenues.

Subscribers

At the end of the third quarter, total access lines were 13.150 million compared with 13.950 million in the year-earlier quarter. CenturyLink added nearly 33,000 high-speed Internet customers during the quarter, bringing the total to 5.942 million (up 2.3% year over year).

Liquidity

CenturyLink exited the quarter with $266 million of cash and cash equivalents compared with $211 million at the end of 2012. Long-term debt increased to $20,391 million from $19,400 million at 2012 end. The company generated operating cash flow of $4,408 million at the end of the third quarter, while free cash flow was $2,470 million.

Guidance

For the fourth quarter of 2013, the company expects adjusted earnings and operating revenues of 55 cents to 60 cents and $4.50 billion to $4.55 billion, respectively. Operating cash flows are expected between $1.75 billion and $1.80 billion.

CenturyLink reaffirmed its financial guidance for 2013. Revenues are expected at $18.05–$18.20 billion, reflecting a drop of 1% to 1.8% from the last year. Adjusted earnings are expected in the range of $2.63 to $2.73 per share. Operating cash flows will likely be $7.35 billion to $7.50 billion, while capital expenditure is estimated at $2.9 billion to $3.0 billion.

Our Analysis

CenturyLink – which has business tie-ups with Verzion Communications Inc. (VZ - Analyst Report) – 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 operators like LEAP Wireless International Inc. and Frontier Communications Corporation (FTR - Analyst Report), 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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