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CenturyLink Inc. (CTL - Analyst Report) posted first-quarter 2014 adjusted earnings of 38 cents per share, considerably lagging the Zacks Consensus Estimate of 61 cents. Earnings also deteriorated substantially from the prior-year quarter number of 76 cents. The underperformance can be traced back to access line losses that resulted in lower access revenues.

 

Quarterly revenues of $4,538 million surpassed the Zacks Consensus Estimate of $4,475 million. Revenues jumped 0.6% from the first-quarter 2013 mark of $4,513 million.

The performance reflects strong contributions from broadband, Prism TV and the demand from business customers for data and hosting services, partially negated by losses in access line and poor performing legacy services.

Segment Results

Consumer revenues remained flat year over year at $1,509 million in the quarter. Strategic revenues increased on high-speed Internet, Prism TV subscriber addition, rate hikes on selected services and lower customer churn. The segment registered Prism TV subscriber growth of nearly 24,000 and ended the quarter with almost 200,000 subscribers.

Business revenues were $1,559 million, up 3.6% year over year. The company’s strength in high-bandwidth offerings and solid sales momentum drove the results.

The Wholesale segment generated revenues of $862 million, down 4.9% from the prior-year quarter. The drop was due to reduced access rates and lower long-distance and switched access minutes of use. The company completed over 395 fiber builds in the quarter and reduced the expected fiber builds in 2014 between 2,500 and 3,000 owing to customers’ decisions to defer certain cities in 2015. The company exited the first quarter of 2014 with more than 19,200 fiber connected towers.

Data Hosting revenues increased 6.0% year over year to $354 million, driven by growth in managed hosting along with colocation service revenues, as cross-selling initiatives continue to strengthen.

Subscribers

At the end of the first quarter of 2014, total access lines were 12.882 million compared with 13.002 million a year ago. CenturyLink added nearly 66,000 high-speed Internet customers during the year, thus bringing the total to 6.057 million (up 10.0% year over year).

Liquidity

CenturyLink exited the first quarter of 2014 with $219 million of cash and cash equivalents compared with $168 million at the end of fiscal 2013. Long-term debt decreased to $19,814 million from $20,181 million at year-end 2013. The company generated operating cash flow of $1,788.0 million in the quarter, while free cash flow was $860.0 million.

Share Repurchase

The company repurchased 58.7 million shares through May 6, 2014, aggregating $1.97 billion since the inception of a $2.0 billion buyback program initiated in Feb 2013.

Guidance

For the second quarter of 2014, the company expects earnings and operating revenues in the range of 62 cents to 67 cents and $4.48 billion to $4.53 billion, respectively. Operating cash flows are expected between $1.75 billion and $1.80 billion.

Other Stocks

United States Cellular Corp. (USM - Analyst Report), a subsidiary of Telephone and Data Systems Inc. (TDS - Analyst Report), reported first-quarter 2014 loss per share of 51 cents, much wider than the Zacks Consensus Estimate of a loss of 41 cents.

On the other hand, Frontier Communications Corp. (FTR - Analyst Report) reported its first-quarter 2014 adjusted earnings per share of 5 cents, missing the Zacks Consensus Estimate by a penny.

Our Analysis

We expect the company to perform impressively in the coming months backed by broadband expansion, faster fiber builds, better cloud computing and hosting solutions, and the penetration of Prism TV into new markets which is likely to drive profitability.

However, stiff competition, deteriorating legacy voice and access revenues, regulatory issues and constant need for technology upgrades may impact the company’s operating performance. CenturyLink has a Zacks Rank #3 (Hold).

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