CenturyLink 1Q Earnings Beat Ests

CenturyLink Inc. ( CTL - Analyst Report ) reported mixed first quarter 2013 results, owing to well performing broadband, Prism TV and data hosting units supported by growing demand from customers and low operating expenses. These were partially offset by access line losses and dull legacy services.

The company posted quarterly adjusted earnings of 76 cents per share, beating the Zacks Consensus Estimate of 69 cents. Comparing with the prior-year quarter, the results improved 11.8% from 68 cents.

Quarterly revenues of $4,513 million failed to meet the Zacks Consensus Estimate of $4,524 million. However, revenues fell from the first quarter 2012 mark of $4,610 million.

Segment Results

Effective first quarter, CenturyLink restructured its operating segments into four reporting units – Consumer, Business, Wholesale and Data Hosting services.

Consumer revenues declined 3.4% year over year to $1,511 million in the reported quarter. Slowdown in the legacy business was mainly responsible for the decline. The segment registered Prism TV subscriber growth of over 13,400.

Business revenue was $1,504 million in the first quarter, almost unchanged from the prior-year quarter figure. The company’s strength in high-bandwidth offerings was weakened by a drop in legacy services and data integration revenues.

Wholesale segment generated revenues of $907 million in the reported quarter, down 5.7% on a year-over-year basis. The plunge was fueled by the introduction of reduced access rates. The company completed over 800 fiber builds in the quarter and is on track to cover 4,000 to 5,000 fiber builds throughout the year.

Data Hosting revenue increased 7.7% year over year to $334 million, driven by growth in managed hosting along with colocation services.

Subscribers

At the end of first quarter, total access lines were 13.558 million compared with 14.379 million in the year-earlier period. CenturyLink added nearly 66,700 high-speed Internet customers during the quarter, thus bringing the total to 5.915 million (up 2.9% year over year).

Liquidity

CenturyLink exited the quarter with $476 million of cash and cash equivalents compared with $211 million at the end of 2012. Long-term debt increased to $19,595 million from $19,400 million at year-end 2012. The company generated operating cash flow of $1,397 million in the quarter, while free cash flow was $1,006 million.

As of May 7, the company bought back 19.2 million shares for $682 million under the authorized new share repurchase program.

Guidance

For the second quarter of 2013, the company expects earnings and operating revenues in the range of 63 cents to 68 cents and $4.49 billion to $4.54 billion, respectively. Operating cash flows are expected to range between $1.82 billion and $1.86 billion.

For full-year 2013, CenturyLink expects revenues in the range of $18.1-$18.3 billion, reflecting a drop of 0.5% to 1.5% from the last year. Adjusted EPS is expected in the range of $2.60 to $2.75. Operating cash flows will likely be in range of $7.35 billion to $7.55 billion, while capital expenditure is expected to be about $2.8 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, implying a Hold rating.

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 launch of Prism TV in new markets.

However, stiff competition from other low-cost telecom operators like LEAP Wireless International Inc. ( LEAP - Analyst Report ) and Clearwire Corp. ( CLWR - Snapshot Report ) , regulatory issues coupled with the constant need for technology upgrades may impede the company’s operating performance going forward.