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CenturyLink Inc. (CTL - Analyst Report) reported third quarter 2012 adjusted earnings of 66 cents per share beating the Zacks Consensus Estimate of 59 cents and the year-ago earnings of 61 cents.

Adjusted earnings per share exclude the impacts of special items related to amortization of intangible assets, interest expense, acquisition-related adjustments and changes in income tax rate.

Quarterly revenues were $4,571 million, ahead of the Zacks Consensus Estimate of $4,566 million. However, revenues fell from the third quarter 2011 mark of $4,596 million due to the impact of access line losses and lower access revenues, partially offset by $58 million incremental revenues from the Savvis acquisition completed and higher strategic revenues.

Segment Results

Regional Markets revenues declined 2.1% year over year to $2.5 billion in the reported quarter. Slowdown in the legacy business was mainly responsible for the decline.  The segment registered Prism TV subscriber growth over 10,000.

Wholesale Markets revenue was $908 million in the third quarter, down 7.6% year over year, mainly attributable to lower switch access revenue as most subscribers are substituting their fixed line services with wireless and VoIP technology services. In addition, implementation of the CAF (Connect America Fund) rate reduction also contributed to the decline.

Enterprise Markets – Network generated revenues of $658 million in the reported quarter, up 5.6% on a year-over-year basis. The growth was fueled by high-bandwidth offerings and data integration revenues, partially offset by declines in legacy services revenues.

Enterprise Markets – Data Hosting revenue increased 8.1% year over year to $280 million, driven by growth in managed hosting, cloud services, colocation alongside financials and consumer solutions.

Subscribers

At the end of the third quarter, total access lines were 13.95 million compared with 14.8 million in the year-ago quarter. CenturyLink added 44,000 high-speed Internet customers during the reported quarter, thus bringing the total to 5.81 million (up 4.1% year over year).

Liquidity

CenturyLink exited the third quarter with $194 million of cash and cash equivalents compared with $128 million at the end of fiscal 2011. Long-term debt decreased to $19.5 billion from $21.4 billion at year-end 2011. The company generated free cash flow of $905 million in the third quarter compared to $881 million in the year-ago quarter.

The company generated operating cash flow of $1.90 billion in the third quarter compared with $1.88 billion in the year-ago quarter, primarily due to lower personnel expenses and the Savvis acquisition’s contribution to operating cash flow, partially offset by the decline in legacy revenues.

Guidance

For the fourth quarter, the company expects earnings and operating revenues in the range of $0.64 to $0.69 and $4.56 to $4.61 billion, respectively. Operating cash flows are expected to range between $1.90 billion and $1.94 billion.

For full year 2012, CenturyLink expects revenues in the range of $18.35-$18.4 billion, slightly up from $18.30-$18.4 billion. Adjusted EPS is expected in the range of $2.64 to $2.69, raised from the previous guidance of $2.45-$2.55. Capital Expenditures for the year have been increased to $2.75-$2.85 billion from the previously expected range of $2.7-$2.8 billion. Free cash flow is expected around $3.3-$3.4 billion compared to the previous estimate of $3.25-$3.4 billion.

In the press release, the company also provided glimpses of 2013 earnings outlook.  CenturyLink expects rate of revenue decline for 2013 versus 2012 to be in the range of 0.5% -1.5%. Further, operating and free cash flows are estimated to be lower in 2013 given continued shift in its legacy and strategic revenue mix and investment in key strategic initiative. In addition, the company expects lower acquisition synergies compared to synergies it expects to realize in 2012.

Our Analysis                                                                             

CenturyLink has successfully undertaken integration and operation of the Embarq properties, mitigating the rate of access line loss and meeting customer demand for high-speed Internet and high-bandwidth services. We believe that the Qwest and Savvis acquisitions will significantly enhance CenturyLink's position as a global communications leader and strengthen its ability to drive long-term shareholder value. However, significant integration challenges as well as increased operating expenses resulting from the acquisitions may impede operating performance going forward. In addition, the company faces stiff competition from its peers like Leap Wireless International Inc. .

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

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