The fourth-largest U.S. landline operator CenturyLink Inc. (CTL) has reported fourth quarter adjusted earnings of 55 cents per share, failing to meet the Zacks Consensus Estimate of 61 cents.

Adjusted earnings plunged 26.7% from the year-ago earnings of 75 cents. The downfall was due to steeper operating expenses and lower legacy voice and access revenues given loss of customers and lower minutes of use that clouded over higher strategic revenues.

Adjusted earnings per share excluded the impact of special items related to the non-cash effect of the amortization of intangibles, interest expense of the assignment of fair value to debt outstanding related to the Embarq, Qwest and Savvis transactions, and acquisition-related adjustments, special items and tax adjustments.

Adjusted earnings for the full year were $2.64 versus $3.04 a year ago. The decline was due to lower legacy voice and access revenue.

Quarterly revenue jumped 170.2% year over year to $4.653 billion, and was above the Zacks Consensus Estimate of $4.619 billion. The whopping year-over-year increase was primarily backed by revenue contributions of $2.730 billion and $260 million from the Qwest and Savvis acquisitions, respectively. Additionally, higher strategic revenues and a lower rate of decline in legacy voice and access revenues also aided the quarter’s revenue growth. Revenues for fiscal 2011 grew 120% year over year to $15.4 billion.

Segment Results

Regional Markets Group revenues shot up 96.7% year over year to $2.24 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 $947 million in the fourth quarter compared with $65 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 150% from the year-ago quarter to $955 million, owing to higher strategic and legacy service revenue.

Savvis, acquired in July 2011, generated $260 million of revenues in the reported quarter.

Subscribers

At the end of the fourth quarter, total access lines fell 6.7% year over year to 14.6 billion. CenturyLink added 70,000 high-speed Internet customers during the reported quarter, bringing the total to 5.55 million (up 4.5% year over year).

Liquidity

CenturyLink exited the fourth quarter with $128 million of cash and cash equivalents compared with $173 million in the year-ago quarter. Long-term debt increased to $21.4 billion from $7.3 billion at year-end 2010.

The company generated operating cash flow of $1.8 billion in the fourth quarter compared with $864 million in the year-ago quarter primarily on the Qwest acquisition. Adjusted free cash flow was $515 million, up from $372 million in the year-ago quarter. Capital expenditure was $896 million compared with $255 million in the year-ago quarter.

Guidance

For the first quarter 2012, CenturyLink projects revenues and earnings per share in the bands of $4.58 billion to $4.64 billion and 57 cents to 63 cents, respectively. Operating cash flow is expected in the range of $1.84-$1.90 billion.

For full year 2012, CenturyLink expects revenues and earnings per share in the bands of $18.2 billion to $18.4 billion and $2.25 to $2.45, respectively. Operating cash flow is expected in the range of $7.4-$7.6 billion. Capital expenditures and free cash flow is expected in the range of $2.6 billion to $2.8 billion and $3.2 billion to $3.4 billion, respectively.

Our Analysis

CenturyLink is successfully integrating and operating the Embarq properties, mitigating the rate of access line loss and meeting customer demand for high-speed Internet and high-bandwidth services. We believe that the Qwest and Savvis acquisitions will significantly enhance its position as a global communications leader and strengthen its ability to drive long-term shareholder value. The acquisitions will also 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 going forward.

We have a long-term Neutral recommendation on the stock. For the short term (1-3 months), CenturyLink retains a Zacks #3 Rank.

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