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Why Is CenturyLink (CTL) Down 6.7% Since Last Earnings Report?

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A month has gone by since the last earnings report for CenturyLink (CTL - Free Report) . Shares have lost about 6.7% 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 Q4 Earnings Beat on Higher Revenues

CenturyLink reported mixed fourth-quarter 2018 financial results wherein the top line missed the Zacks Consensus Estimate but the bottom line surpassed the same. Notably, both the figures increased on a year-over-year basis.

Net Loss

Net loss for the fourth quarter was $2,412 million or loss of $2.26 per share against net income of $1,117 million or $1.26 per share in the year-ago quarter. The year-over-year deterioration was primarily due to higher operating expenses and income tax expenses. For 2018, net loss was $1,733 million or loss of $1.63 per share against net income of $1,389 million or $2.21 per share in 2017.

Net income (excluding integration-related expenses and special items) came in at $394 million or 37 cents per share compared with $161 million or 18 cents per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 1 cent.


Quarterly operating revenues increased 8.5% year over year to $5,778 million on the back of incremental revenues from integration of Level 3. The top line, however, lagged the consensus estimate of $5,797 million. For full-year 2018, revenues increased 32.8% year over year to $23,443 million.

Business revenues were $4,316 million compared with pro forma revenues of $4,415 million in the year-ago quarter. The top line was affected by slower sales and the adoption of the new revenue recognition standard. Consumer revenues were $1,285 million compared with pro forma revenues of $1,401 million in the fourth quarter of 2017 due to headwinds related to retail video in early last year and voice attrition, partly offset by growth in broadband revenues.

By Business unit, Medium & Small business revenues were $825 million while Enterprise revenues totaled $1,329 million. Wholesale & Indirect, and International & Global Accounts generated $1,237 million and $925 million, respectively. By Service type, revenues from IP & Data services were $1,818 million while the same from Transport & Infrastructure, Voice & Collaboration, IT & Managed Services and Regulatory totaled $2,056 million, $1,582 million, $145 million and $177 million, respectively.

Other Quarterly Details

Total operating expenses increased 58.8% year over year to $7,619 million on account of goodwill impairment. Operating loss was $1,841 million against income of $524 million in the prior-year quarter, mainly due to higher operating expenses. Adjusted EBITDA rose to $2,189 million from pro forma $1,992 million. Adjusted EBITDA margin was 37.9% compared with pro forma 33.2% 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 negatively affected total revenues by approximately $28 million in the reported quarter, reflecting $25 million impact on Consumer revenues and $3 million impact on Business revenues.

Cash Flow and Liquidity

During full-year 2018, CenturyLink generated $7,032 million of cash from operations compared with $3,878 million in 2017. For 2018, free cash flow (excluding integration-related expenses and special items) was $4,215 million compared with $2,034 million a year ago on pro forma basis.

As of Dec 31, 2018, the communications company had $488 million of cash and cash equivalents with long-term debt of $35,409 million compared with the respective tallies of $551 million and $37,283 million a year ago.

2019 Outlook

For full-year 2019, CenturyLink expects adjusted EBITDA of $9.00-$9.20 billion. While free cash flow is expected in the range of $3.10-$3.40 billion, free cash flow after dividends is projected between $2.025 billion and $2.325 billion. Outlook for capital expenditures is anticipated between $3.50 billion and $3.80 billion, and depreciation (and amortization) is expected to be $4.90-$5.10 billion. Effective income tax rate is expected to be around 25%.

Moving Forward

CenturyLink is shifting focus from integration to transformation. The company’s is aiming to transform its business operations through product evolution and digitizing of customer interactions, which augurs well for future revenue growth. Moreover, CenturyLink is working on generating profitable revenue growth in its business markets. It believes the scale of its global assets alongside innovative product portfolio to be accretive to earnings. The company is also working with customers to enable their 5G roadmaps while extending its fiber footprint.

Furthermore, CenturyLink has changed its capital allocation priorities with reducing the annual dividend from $2.16 to $1. It has also lowered its leverage target to 2.75x-3.25x (net debt to adjusted EBITDA) owing to healthy business fundamentals. The company aims to return significant cash to shareholders while investing in revenues and EBITDA growth drivers. We remain impressed with its solid growth potential.


How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

At this time, CenturyLink has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second 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 trending upward for the stock, and the magnitude of this revision indicates a downward shift. It comes with little surprise CenturyLink has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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