A month has gone by since the last earnings report for CenturyLink (CTL - Free Report) . Shares have added about 2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is CenturyLink due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
CenturyLink Q2 Earnings Top Estimates, Revenues Down
CenturyLink reported decent second-quarter 2020 results, with the top and bottom line beating the Zacks Consensus Estimate. However, lower revenues in the Consumer, Wholesale, SMB and IGAM segments led to year over year top-line contraction.
Net income in the June quarter was $377 million or 35 cents per share compared with $371 million or 35 cents per share in the year-ago quarter. The year-over-over improvement can be attributed to lower operating expenses.
Second-quarter net income (excluding integration and transformation costs, and special items) came in at $450 million or 42 cents per share compared with $369 million or 34 cents per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 10 cents.
Quarterly total operating revenues declined 3.4% year over year to $5,192 million due to lower sales in the Consumer, Wholesale, SMB and International and Global Accounts (IGAM) segments. Nevertheless, the top line surpassed the consensus estimate of $5,138 million.
CenturyLink’s revenues are largely recurring in nature with a well-diversified customer base. By segment, SMB revenues fell 6.1% year over year to $646 million, due to persistent deterioration in legacy voice services. Revenues in Wholesale fell 6.3% year over year to $948 million. CenturyLink expects customers to continue to optimize spending with other vendors in this environment and anticipates witnessing healthy momentum in the upcoming quarters with 5G investments. Consumer revenues fell to $1,316 million from $1,389 million in the year-ago quarter, primarily due to decline in legacy voice revenues. However, it was partially offset by growth in Broadband. The company continues to focus on improving broadband revenue performance while boosting the penetration of competitive assets. In the reported quarter, CenturyLink saw a net loss of 29,000 total broadband subs. In speeds of 100 meg and above, it added 68,000 subs.
Revenues in IGAM declined 3.2% year over year to $849 million due to currency headwinds along with reduced levels of activity across Asia, Latin America and Europe stemming from COVID-19 related business shutdowns. Meanwhile, Enterprise revenues inched up 1.7% year over year to $1,433 million, primarily driven by solid collaboration services on the back of a revamped network infrastructure. Despite COVID-19 challenges, the company expects both IGAM and Enterprise segments to witness a significant push in their digital strategies with growing sales orders in the near term.
Total operating expenses declined 2.5% year over year to $4,289 million, primarily due to lower SG&A and amortization expenses. Operating income was $903 million compared with $976 million in the prior-year quarter. Adjusted EBITDA slipped to $2,085 million from $2,215 million in the year-ago quarter. The adjusted EBITDA margin was 40.2% compared with 41.2% in the year-ago quarter. Capital expenditures were $1,009 million compared with $800 million in the prior-year quarter.
Cash Flow & Liquidity
In the first six months of 2020, CenturyLink generated $3,048 million of net cash from operations compared with $2,883 million in the year-ago quarter. Free cash flow (excluding cash integration and transformation costs, and special items) for the quarter was $803 million compared with $956 million in the prior-year quarter. As of Jun 30, the company had $1,763 million in cash and cash equivalents with $31,414 million of long-term debt. Notably, 2020-2025 debt maturities have been reduced by approximately $14 billion.
2020 Guidance Updated
Due to uncertainties related to COVID-19, CenturyLink has withdrawn its 2020 outlook for adjusted EBITDA, free cash flow and capital expenditures. However, the company expects net cash interest in the range of $1.65-$1.70 billion down from the prior guidance of $1.75-$1.80 billion. Depreciation and amortization outlook remained unchanged within the range of $4.7-$4.9 billion. The effective income tax rate, too, remained unchanged and is likely to be around 28%.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
Currently, CenturyLink has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, CenturyLink has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.