Before the opening bell, the third-largest U.S. landline operator CenturyLink Inc. (CTL), reported first quarter 2011 adjusted earnings of 76 cents per share, beating the Zacks Consensus Estimate of 72 cents. However, adjusted earnings fell 18.3% from the year-ago earnings of 93 cents.

Adjusted earnings exclude integration and severance-related costs of approximately 6 cents per share associated with the Embarq acquisition (completed on July 1, 2009) and transaction and integration costs of 1 cent a share related to the Qwest acquisition completed on April 1.

Net income also fell 16.5% year over year to $233.2 million in the reported quarter.

Total revenue declined 5.8% year over year to $1.696 billion, but inched past the Zacks Consensus Estimate of $1.697 billion. The decline in revenues is primarily due to access line losses, lower access revenues and migration from fixed lines to wireless.


Total access lines dropped 7.5% year over year to 6.4 million. CenturyLink added more than 52,000 high-speed Internet customers during the reported quarter, bringing the total to 2.45 million (up 6.1% year over year).


CenturyLink exited the first quarter with $269.7 million of cash and cash equivalents compared with $172.9 million in fiscal 2010. Long-term debt declined to $7.17 billion from $7.32 billion at the end of fourth quarter 2010.

The company generated operating cash flow of $868.3 million compared with $934.9 million in the year-ago quarter. Adjusted free cash flow was $527.54 million, down from $632.78 million in the year-ago quarter. Capital expenditure was $210.6 million in the reported quarter compared with $167.2 million in the year-ago quarter.


For the second quarter, combining both CenturyLink and Qwest operations (effective April 1, 2011), CenturyLink projects revenue and earning per share of $4.40 to $4.43 billion and 63 to 67 cents, respectively.

CenturyLink revised its fiscal 2011 forecast to incorporate the combined operations. The company expects operating revenue in the range of $14.9–$15.1 billion and earnings of $2.55–$2.65 per share. Capital expenditures are expected in the range of $2.2–$2.3 billion.

Our Analysis

We believe the growth momentum for the company’s broadband Internet business was more than offset by losses in the fixed voice access lines.

While the merger with Embarq and Qwest as well as the pending Savvis Inc. (SVVS) acquisition may yield a number of operational benefits and cost synergies, significant integration challenges may impede future operating performance. In addition, competitive threats, increased investments, lower revenue and earnings as well as a high debt level make us cautious about the stock.

On the other hand, we believe the acquisitions and mergers will provide CenturyLink a competitive edge over its two major rivals, AT&T Inc. (T) and Verizon Communications Inc. (VZ), with greater scale and operational efficiency in a mature U.S. home-phone market.

Consequently, we are currently maintaining our long-term Neutral recommendation on the stock with the Zacks # 3 (Hold) Rank.

CENTURYTEL INC (CTL): Free Stock Analysis Report
SAVVIS INC (SVVS): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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