CenturyLink Profit Falls, Rev Ups (CTL) (T) (VZ)

Zacks

The third-largest U.S. landline operator CenturyLink Inc. (CTL) has reported third quarter adjusted earnings of 34 cents per share, at par with the Zacks Consensus Estimate.

Adjusted earnings dropped a drastic 59% from the year-ago earnings of 83 cents. The downfall was due to steeper operating expenses related to Qwest and Savvis acquisitions.

Adjusted earnings per share exclude transaction and integration costs of 11 cents related to the Embarq, Qwest and Savvis acquisitions.

Total revenue jumped 162.9% year over year to $4.596 billion, but was slightly below the Zacks Consensus Estimate of $4.598 billion. The whopping year-over-year increase was primarily backed by the Qwest and Savvis acquisitions. Additionally, higher strategic revenues were responsible for the growth.

Segment Results

Regional Markets Group revenues shot up 92.9% year over year to $2.22 billion in the reported quarter. The decline in data integration revenue was compensated by growth in strategic and legacy service revenues.

Business Markets Group revenue was $927 million in the third quarter compared with $67 million in the year-ago quarter. The massive growth was credited to increased data integration, strategic and legacy service revenues.

Wholesale Markets Group revenue skyrocketed 151.7% from the year-ago quarter to $979 million, owing to higher strategic and legacy service revenue.

Savvis, effective July 15, generated $223 million of revenues in the reported quarter.

Subscribers

Total access lines fell 7.1% year over year to 14.8 billion. CenturyLink added 57,000 high-speed Internet customers during the reported quarter, bringing the total to 5.48 million (up 4% year over year).

Liquidity

CenturyLink exited the third quarter with $1.1 billion of cash and cash equivalents compared with $243 million in the year-ago quarter. Long-term debt increased to $21.1 billion from $7.32 billion at year-end 2010.

The company generated operating cash flow of $1.4 billion compared with $600 million in the year-ago quarter. Adjusted free cash flow was $891 million, up from $415 million in the year-ago quarter. Capital expenditure was $721 million compared with $238 million in the year-ago quarter.

Guidance

For the fourth quarter, CenturyLink projects revenues and earnings per share in the bands of $4.60 to $4.65 billion and 58 to 62 cents, respectively. Operating cash flow is expected in the range of $1.87–$1.92 billion.

CenturyLink reaffirmed its fiscal 2011 projections. The company expects earnings of $2.65–$2.69 per share.

Our Analysis

We believe the acquisitions of Embarq, Qwest and Savvis would yield significant operational benefits and cost synergies going forward. The acquisitions will further provide a competitive edge over its two major rivals, AT&T Inc. (T) and Verizon Communications Inc. (VZ). However, significant integration challenges as well as increased operating expenses resulting from the acquisitions may impede operating performance ahead.

We recently upgraded our long-term recommendation to Neutral on the stock. For the short term (1–3 months), CenturyLink retains a Zacks #3 (Hold) Rank.

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