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Why Is CenturyLink (LUMN) Up 13.3% Since Last Earnings Report?

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A month has gone by since the last earnings report for CenturyLink (LUMN - Free Report) . Shares have added about 13.3% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Lumen Q3 Earnings Beat Estimates, 2020 View Revised

Lumen reported decent third-quarter 2020 results, with the top and bottom line beating the respective Zacks Consensus Estimate. However, lower revenues in the Consumer, Wholesale, Small and Medium Business (SMB), and International and Global Accounts Management (IGAM) segments led to year over year top-line deterioration.

Net Income

Net income in the September quarter was $366 million or 34 cents per share compared with $302 million or 28 cents per share in the year-ago quarter. The year-over-over improvement, despite top-line contraction, can be attributed to lower operating and interest expenses.

Third-quarter adjusted net income (excluding integration and transformation costs, and special items) came in at $430 million or 40 cents per share compared with $328 million or 31 cents per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 9 cents.

Revenues

Quarterly total operating revenues declined 3.4% year over year to $5,167 million due to lower sales in the Consumer, Wholesale, SMB and IGAM segments. Nevertheless, the top line surpassed the consensus estimate of $5,150 million.

Lumen’s revenues are largely recurring in nature with a well-diversified customer base. By segment, SMB revenues fell 5.8% year over year to $635 million, due to persistent deterioration in legacy voice services. Within SMB, the company sold legacy correctional facility communications business, which is expected to negatively impact revenues of about $15 million in the next quarter. Revenues in Wholesale declined 6.7% year over year to $949 million. Markedly, Lumen anticipates witnessing healthy momentum in Quantum investments and fiber to the home investment strategy to bolster growth of consumer and small business markets in the upcoming quarters.

Consumer revenues fell to $1,309 million from $1,365 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, Lumen incurred a net loss of 75,000 total broadband subscribers. In speeds of 100 Mbps and above, it added 62,000 subscribers.

Revenues in IGAM declined 3.6% year over year to $835 million due to currency headwinds along with reduced levels of activity across Latin America and Europe on account of COVID-19 resurgence. Meanwhile, Enterprise revenues inched up 0.8% year over year to $1,439 million, primarily driven by robust sales volume and strength in federal business. Despite macroeconomic 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.

Other Details

Total operating expenses declined 2.8% year over year to $4,279 million, primarily due to lower cost of services and products coupled with amortization expenses. Operating income was $888 million compared with $950 million in the prior-year quarter. Adjusted EBITDA slipped to $2,112 million from $2,223 million in the year-ago quarter. The adjusted EBITDA margin was 40.9% compared with 41.6% in the year-ago quarter. Capital expenditures were $988 million compared with $957 million in the prior-year quarter.

Cash Flow & Liquidity

In the first nine months of 2020, Lumen generated $4,842 million of net cash from operations compared with $4,771 million in the year-ago period. Free cash flow (excluding cash integration and transformation costs, and special items) for the quarter was $917 million compared with $983 million in the prior-year quarter. As of Sep 30, 2020, the company had $526 million in cash and cash equivalents with $31,105 million of long-term debt. Notably, 2020-2025 debt maturities have been reduced by approximately $15 billion.

2020 Guidance Updated

Due to uncertainties related to COVID-19, Lumen has withdrawn its 2020 financial outlook for adjusted EBITDA, free cash flow and capital expenditures. However, the company expects net cash interest in the range of $1.62-$1.65 billion, down from the prior guidance of $1.65-$1.70 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%.

Going Forward

With continued progress on cost transformation initiatives, Lumen ended the quarter with solid free cash flow generation driven by effective capital allocation decisions and refinancing activities. It focuses on four key areas — Communications & Collaboration, Edge Cloud & IT Agility, Connected Security and Adaptive Networking. Also, investing in growth through product and network expansions, delivering enhanced customer experience across business as well deleveraging to strengthen its balance sheet remain some of its key priorities. Based on these strategic endeavors, Lumen expects the revenue trajectory to improve in the long run. The Monroe, LA-based communications company’s Quantum Fiber platform and IP-based network capacity also positions it well to support customers and deliver long-term shareholders’ value.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, CenturyLink has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, CenturyLink has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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