CenturyLink Inc. (CTL), which is in the process of buying Qwest Communications Inc. (Q), declared its fourth quarter and fiscal 2010 results before the opening bell. The company reported fourth quarter adjusted earnings of 76 cents per share, beating the Zacks Consensus Estimate by a penny. However, adjusted earnings slipped 20% from the year-ago earnings of 95 cents.
Adjusted earnings exclude integration and severance-related costs of approximately 5.6 cents per share associated with the Embarq acquisition (completed on July 1, 2009) and transaction and integration costs of 2.3 cents per share related to the pending Qwest acquisition. These costs were partially offset by a net gain of 4 cents associated with freezing certain future defined benefit pension accruals and income tax benefit of 1 cent per share.
Fiscal 2010 adjusted earnings declined to $3.39 compared with $3.60 in the prior year. The company generated $85 million and $340 million synergies from the Embarq acquisition during the fourth quarter and fiscal 2010.
Total revenue fell 6.4% year over year to $1.721 billion but was higher than the Zacks Consensus Estimate of $1.715 billion. The decline in revenues is primarily due to access line losses, lower access revenues and migration from fixed lines to wireless. Revenue climbed 41.6% year over year to $7.04 billion in fiscal 2010.
Subscribers
Total access lines dropped 7.6% year over year to 6.5 million. CenturyLink added more than 29,000 high-speed Internet customers during the reported quarter, bringing the total high-speed Internet subscriber base to 2.39 million (up 7.1% year over year).
Liquidity
CenturyLink exited fiscal 2010 with $172.9 million of cash and cash equivalents compared with $161.8 million in the prior year. Long-term debt increased to $7.32 billion at the end of 2010 from $7.25 billion in 2009.
The company generated free cash flow of $342 million, excluding non-recurring items of $7.1 million and $9.1 million of acquisition related capital expenditures, in the reported quarter. It returned approximately $221 million of free cash flow to shareholders in the form of dividends.
Guidance
CenturyLink released its financial forecasts for first quarter 2011 and fiscal 2011. The carrier expects revenues of $1.68-$1.70 billion and earnings of 66 to 70 cents per share.
For fiscal 2011, the company expects total revenue to decline 4% to 5% from 2010 levels and that the rate of decline will reach 2% – 3% by the fourth quarter. CenturyLink did not provide an earnings guidance due to the expected completion of the Qwest merger in April. However, the company states that various items will adversely affect 2011 earnings by 49 cents to 55 cents per share.
CenturyLink also expects 2011 capital expenditure to be approximately $1 billion, up 16% year over year.
Our Analysis
We believe the growth momentum for the company’s broadband internet business is more than offset by losses in the fixed voice access lines. Thus, the revenue trend is expected to improve in 2011 attributable to lower access line losses as well as increased strategic revenues.
While the merger with Embarq and the proposed acquisition of Qwest may ultimately yield a number of operational benefits and cost synergies, significant integration challenges may impede future operating performance. In addition, CenturyLink faces intense competition from cable TV operators.
Consequently, we are currently maintaining our long-term Neutral recommendation on the stock. However, CenturyLink retains a Zacks #4 (Sell) Rank based on the carrier’s high debt exposure which adds a degree of operating risk.
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