CenturyLink Beats Estimates in 1Q

The fourth-largest U.S. landline operator CenturyLink Inc. ( CTL - Analyst Report ) reported first quarter 2012 adjusted earnings of 68 cents per share beating the Zacks Consensus Estimate of 59 cents.

However, adjusted earnings plunged 12.8% from the year-ago earnings of 78 cents. The downfall was due to steeper operating expenses and lower legacy voice and access revenues, arising from the loss of customers and lower minute’s usage that clouded over higher strategic revenues.

Adjusted earnings per share exclude the impact of special items related to the non-cash effect of the amortization of intangibles, interest expense of the assignment of fair value to debt outstanding related to the Embarq and Qwest and Savvis transactions, and acquisition-related adjustments and special items related to the income tax rate.

Quarterly revenue soared 171.8% year over year to $4,610 million, and was slightly ahead of the Zacks Consensus Estimate of $4,607 billion.

Segment Results

Markets Group revenues declined 4.1% year over year to $2.2 billion in the reported quarter. Slowdown in the legacy business was mainly responsible for the decline.

Business Markets Group revenue was $917 million in the first quarter, down 1.3% year over year, mainly dampened by the decline in legacy service and data integration revenues.

Wholesale Markets Group revenue was $957 million in the first quarter, down 4.2% year over year, mainly attributable to lower access revenue as most subscribers are substituting their fixed line services with wireless and VoIP technology services.

Savvisgenerated revenues of $266 million in the reported quarter, up 3.9% on a year-over-year basis. Strong orders generated during the quarter fueled growth in the segment.

Subscribers

At the end of the first quarter, total access lines were 14.4 million compared with 14.6 million in the year-ago quarter. CenturyLink added 89,000 high-speed Internet customers during the reported quarter, thus bringing the total to 5.64 million (up 4.2% year over year).

Liquidity

CenturyLink exited the first quarter with $1.5 billion of cash and cash equivalents compared with $128 million at the end of fiscal 2011. Long-term debt increased to $20.6 billion from $20.8 billion at year-end 2011.

The company generated operating cash flow of $1.6 billion in the first quarter compared with $670 million in the year-ago quarter, primarily attributable to the Qwest acquisition. Capital expenditure was $678 million compared with $211 million in the year-ago quarter.

Guidance

For the second quarter 2012, CenturyLink projects revenues and earnings per share in the bands of $4.55 billion to $4.60 billion and 59 cents to 64 cents, respectively. Operating cash flow is expected in the range of $1.86–$1.91 billion.

For full year 2012, CenturyLink expects revenues and earnings per share in the bands of $18.2 billion to $18.4 billion and $2.35 to $2.55, respectively. Operating cash flow is expected in the range of $7.45–$7.65 billion. Capital expenditures and free cash flow are expected in the range of $2.6 billion to $2.8 billion and $3.2 billion to $3.4 billion, respectively.

Our Analysis

CenturyLink is successfully integrating and operating the Embarq properties, mitigating the rate of access line loss and meeting customer demand for high-speed Internet and high-bandwidth services. The company believes that the Qwest and Savvis acquisitions will significantly enhance its position as a global communications leader and strengthen its ability to drive long-term shareholder value. The acquisitions will also provide a competitive edge over its two major rivals, AT&T Inc. ( T - Analyst Report ) and Verizon Communications Inc. ( VZ - Analyst Report ) . However, significant integration risks as well as increased operating expenses resulting from the acquisitions may impede operating performance ahead.

We have a long-term Neutral recommendation on the stock. For the short term (1–3 months), CenturyLink retains a Zacks #3 (Hold) Rank.