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Why Is CenturyLink (CTL) Down 17.1% Since Last Earnings Report?

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It has been about a month since the last earnings report for CenturyLink (CTL - Free Report) . Shares have lost about 17.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is CenturyLink due for a breakout? 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 drivers.

CenturyLink Q3 Earnings Beat, Revenues Increase Y/Y

CenturyLink reported mixed third-quarter 2018 results wherein the top line missed the Zacks Consensus Estimate but the bottom line surpassed the same.

Net Income

Net income for the third quarter was $272 million or 25 cents per share compared with $92 million or 17 cents per share in the year-ago quarter. The year-over-year increase was primarily driven by top-line growth. Adjusted net income (excluding integration-related expenses and special items) came in at $327 million or 30 cents per share compared with $114 million or 21 cents per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 3 cents.

Quarter Details

Quarterly operating revenues increased 44.2% year over year to $5,818 million driven by incremental revenues from Level 3. The top line, however, lagged the Zacks Consensus Estimate of $5,890 million. Total operating expenses increased 38.8% year over year to $4,924 million. Operating income improved 83.6% to $894 million mainly due to higher revenues. Operating margin was 15.4% compared with 12.1% in the year-ago quarter. Adjusted EBITDA rose to $2,228 million from pro forma $2,109 million. Adjusted EBITDA margin was 38.3% compared with pro forma 35% a year ago. As of Jan 1, 2018, the company adopted the new revenue recognition standard, ASC 606. Overall, the adoption of this new standard affected total revenues by approximately $15 million in the reported quarter, reflecting $12 million positive impact on Consumer revenues and $3 million positive impact on Business revenues.

Financial Metrics

Business revenues were $4,463 million compared with pro forma revenues of $4,613 million in the year-ago quarter. The sales figure was affected by slower sales and the adoption of the new revenue recognition standard. Consumer revenues were $1,355 million compared with pro forma revenues of $1,420 million in the third quarter of 2017. The company saw a net loss of about 63,000 broadband subscribers in the reported quarter. By Business unit, Medium & Small business revenues were $860 million, while Enterprise revenues were $1,278 million. Consumer, Wholesale & Indirect, and International & Global Accounts generated $1,355 million, $1,255 million and $892 million, respectively. By Service type, revenues from IP & Data services were $1,796 million, while that from Transport & Infrastructure and Voice & Collaboration totaled $2,051 million and $1,640 million, respectively.

Cash Flow and Liquidity

For the first nine months of 2018, CenturyLink generated $5,036 million of cash from operations compared with $2,700 million in the prior-year period. In third-quarter 2018, free cash flow (excluding integration-related capital expenditures and special items) was $1,163 million compared with $600 million in the year-ago quarter on a pro forma basis. As of Sep 30, 2018, the company had $390 million of cash and cash equivalents with long-term debt of $35,749 million.

2018 View

For full-year 2018, CenturyLink has reiterated its outlook for adjusted EBITDA of $9.00-$9.15 billion. However, the company has updated its free cash flow, free cash flow after dividends and capital expenditures guidance due to lower capital spending. Free cash flow is now expected in the range of $4.00-$4.20 billion, up from $3.60-$3.80 billion expected earlier. Free cash flow after dividends is projected between $1.70 billion and $1.90 billion, up from the previous range of $1.30-$1.50 billion. Effective income tax rate is expected to be around 18% for 2018.

Going Forward

CenturyLink’s focus on transforming its business operations through product evolution and digitizing of customer interactions bodes well for the future. The company has introduced Dynamic Connections as part of its Cloud Connect portfolio and announced the global expansion of its SD-WAN solutions, while expanding its platform to cloud service and software-as-a-service providers. Also, CenturyLink is working with customers to deploy 5G roadmaps while extending its fiber footprint.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 17.32% due to these changes.

VGM Scores

At this time, CenturyLink has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% 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 trending upward for the stock, and the magnitude of this revision looks promising. 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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