Before the opening bell, the third-largest U.S. landline operator CenturyLink Inc. (CTL), has reported second quarter adjusted earnings of 44 cents per share, which came nowhere near the Zacks Consensus Estimate of 66 cents. Adjusted earnings dropped a drastic 50% from the year-ago earnings of 88 cents.
Higher-than-expected depreciation and amortization (D&A) expenses of 20 cents per share related to the Qwest acquisition completed on April 1, was responsible for the lackluster performance in the reported quarter.
Adjusted earnings per share excluded transaction and integration costs of 26 cents related to the Qwest acquisition, integration costs of 2 cents associated with the Savvis acquisition (completed on July 15), integration and severance-related costs of approximately 3 cents associated with the past two year’s Embarq acquisition and tax benefits and gains of 2 cents each from a reduction of an NOL valuation allowance.
Total revenue shot up 148.6% year over year to $4.41 billion, but was slightly below the Zacks Consensus Estimate of $4.43 billion. The whopping year-over-year increase was primarily backed by Qwest acquisition.
Post Qwest buyout, CenturyLink reports in three segments, namely Regional Markets Group, Business Markets Group and Wholesale Markets Group.
Segment Results
Regional Markets Group revenues fell 4.9% year over year to $2.26 billion in the reported quarter. The decline in legacy services and data integration revenues was partially offset by higher strategic revenues.
Business Markets Group revenue declined 4.1% year over year to $922 million, primarily due to lower data integration revenues.
Wholesale Markets Group revenue dropped 4.6% from the year-ago quarter to $975 million, owing to lower legacy services revenue partially offset by strategic service revenue.
Subscribers
Total access lines showed a significant improvement of 123% year over year to 15.1 billion. CenturyLink added more than 12,200 high-speed Internet customers during the reported quarter, bringing the total to 5.43 million (up 137.2% year over year).
Liquidity
CenturyLink exited the second quarter with $2.5 billion of cash and cash equivalents compared with $173 million in fiscal 2010. Long-term debt increased to $19.7 billion from $7.32 billion at 2010 end.
The company generated operating cash flow of $1.9 billion compared with $923 million in the year-ago quarter. Adjusted free cash flow was $950 million, up from $267 million in the year-ago quarter. Capital expenditure was $579 million compared with $195 million in the year-ago quarter.
Guidance
For the third quarter, combining CenturyLink, Qwest and Savvis operations, CenturyLink projects revenues and earnings per share in the bands of $4.55 to $4.60 billion and 29 to 34 cents, respectively.
CenturyLink revised its fiscal 2011 forecast to incorporate the Savvis acquisition. The company expects operating revenue in the range of $15.2–$15.4 billion and earnings of $1.60–$1.70 per share. Capital expenditures and free cash flow are expected in the range of $2.35–$2.50 billion and $2.9–$3.1 billion, respectively.
Our Analysis
We believe the acquisitions of Embarq, Qwest and Savvis may yield significant operational benefits and cost synergies. These will also provide CenturyLink a competitive edge over its two major rivals, AT&T Inc. (T) and Verizon Communications Inc. (VZ).However, significant integration challenges may impede the company’s future operating performance as well as increase its operating cost.
We are currently maintaining our long-term Neutral recommendation on the stock. For the short term (1–3 months), CenturyLink retains a Zacks #3 (Hold) Rank.
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