CenturyLink (CTL), which is in the process of buying Qwest Communications Inc. (Q), reported third quarter adjusted earnings (excluding non-recurring items) per share of 83 cents, beating the Zacks Consensus Estimate of 81 cents. However, adjusted earnings slipped 7.8% from the year-ago earnings of 90 cents.
Adjusted earnings exclude integration costs of 5 cents per share associated with the Embarq acquisition (completed on July 1, 2009), severance cost of 1 cent per share associated with Embarq acquisition, and transaction and integration costs of 1 cent per share related to the pending Qwest acquisition.
The company reported operating revenues of $1.75 billion, down 6.8% from $1.87 billion reported a year ago, higher than the Zacks Consensus Estimate of $1.74 billion. The decline in revenues is primarily due to access line losses, lower access revenues and wireless traffic migration.
Subscribers
Total access lines dropped 7.8% year over year to 6.62 million. CenturyLink added more than 29,000 high-speed Internet customers during the quarter, bringing the total high-speed Internet subscriber base to 2.36 million (up 8% year-over-year).
Liquidity
CenturyLink exited the third quarter with $243 million of cash and cash equivalents and $7 billion of long-term debt. The company generated free cash flow of $383.3 million in the third quarter. It returned approximately $219.7 million of the free cash flow to shareholders in the form of dividends.
Outlook
CenturyLink released its financial forecasts for fourth-quarter 2010. The carrier expects revenues of $1.69-$1.71 billion and diluted earnings of 73 to 77 cents.
For the full year 2010, the company has projected dilutive EPS within a range of $3.36 to $3.40, compared to its prior view of $3.30 to $3.40. Similarly, the company estimated operating revenue for the year to decline to 6.5% to 7%, compared with its prior view of 6.5% to 7.5%.
The company continues to see 2010 capital expenditure to be in the range of $825 million to $875 million.
Our Analysis
Although CenturyLink continues to grow its high-speed internet customer base and associated revenues mainly through mergers and acquitions, the company remains challenged by the declines in fixed voice access lines. CenturyLink faces intense competition from cable TV operators. Moreover, we remain cautious about the carrier’s high debt exposure which adds to the operating risk.
CenturyLink currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.
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