Access Lines Losses Mar CenturyLink Earnings - Analyst Blog

CenturyLink Inc. (CTL) reported mixed fourth quarter and full-year 2013 results. The performance reflects strong contributions from broadband, Prism TV and demand from business customers for data and hosting services partially negated by losses in access line and poor performing legacy services.

The company posted quarterly adjusted earnings of 38 cents per share, missing the Zacks Consensus Estimate of 59 cents. The earnings were flat year over year. The underperformance can be traced back to access line losses that resulted in lower access revenue.

Quarterly revenues of $4,542 million surpassed the Zacks Consensus Estimate of $4,520 million. However, revenues fell from the fourth quarter 2012 mark of $4,583 million.

For full-year 2013, CenturyLink posted earnings per share of $1.64 (lower than our projection and up 7.9% year over year). Revenues decreased 1.5% year over year to $18,095 million.

Segment Results

Consumer revenues declined 1.7% year over year to $1,496 million in the fourth quarter. The segment was hampered by a decline in legacy service business. However, strategic revenues increased on high-speed Internet, Prism TV subscriber addition and rate hikes on selected services. The segment registered Prism TV subscriber growth of over 26,000 and ended the year with 175,000 subscribers.

Business revenues were $1,563 million, up 1.0% year over year. The company's strength in high-bandwidth offerings was weakened by declining legacy services revenues.

Wholesale segment generated revenues of $884 million, down 2.5% from the prior-year quarter. The drop was due to reduced access rates and lower long distance and switched access minutes of use. The company completed over 930 fiber builds in the quarter and built 4,100 towers for the full year, which is more than estimated. The company exited 2013 with more than 18,800 fiber connected towers.

Data Hosting revenues increased 3.8% year over year to $353 million, driven by growth in managed hosting along with colocation service revenues.

Subscribers

At the end of 2013, total access lines were 13.002 million compared with 13.751 million in the prior year. CenturyLink added nearly 140,000 high-speed Internet customers during the year, thus bringing the total to 5.991 million (up 2.4% year over year).

Liquidity

CenturyLink exited 2013 with $168 million of cash and cash equivalents compared with $211 million at the end of fiscal 2012. Long-term debt increased to $20,181 million from $19,400 million at year-end 2012. The company generated operating cash flow of $7,432 million in 2013, while free cash flow was $3,071 million.

Share Repurchase

The company repurchased 50.8 million shares through Feb 11, 2014 aggregating $1.72 billion since the inception of a $2.0 billion buyback program initiated in Feb 2013. The program is expected to be completed by Feb 13, 2015.

Guidance

For the first quarter of 2014, the company expects earnings and operating revenues in the range of 58 cents to 63 cents and $4.46 billion to $4.51 billion, respectively. Operating cash flows are expected between $1.73 billion and $1.78 billion.

For full-year 2014, CenturyLink expects revenues in the range of $17.9–$18.1 billion, reflecting a rise of 0.0% to 1.2% from last year. Adjusted EPS is expected in the range of $2.40 to $2.60. Operating cash flows will likely be $7.05 billion to $7.25 billion.

Other Stock

Another company, Windstream Holdings Inc. (WIN) is expected to release its fourth quarter results on Feb 27, before the market opens.

Our Analysis

With a reformed operating base, we expect the company to perform impressively in the coming months backed by broadband expansion, completion of fiber builds, better cloud computing services and the launch of Prism TV in new markets.

However, stiff competition from operators like Leap Wireless International Inc. (LEAP) and Frontier Communications Corporation (FTR), deteriorating legacy voice and access revenues, regulatory issues and constant need for technology upgrades may impact the company's operating performance. CenturyLink has a Zacks Rank #3 (Hold).