CenturyLink (CTL), formerly CenturyTel Inc, announced results for the second quarter today with adjusted (excluding non-recurring items or non-GAAP) earnings per share of $0.83, beating the Zacks Consensus Estimate of $0.81. Reported earnings per share (GAAP) of $0.68 reflect a decline from $0.88 in the corresponding quarter of 2008.  

The company reported operating revenue of $634.5 million, down 3.4% year over year as growth in data revenue was more than offset by declines in voice and network access revenue. Net income (excluding non-recurring items) decreased to $83.3 million from $91.2 million (down 8.6%) in the second quarter of 2008.
On GAAP basis, net income decreased to $69 million from $92.2 million (down 25%) a year-ago due to integration cost of $22.5 million related to the recent acquisition of Embarq Corporation.
Voice revenue declined 5.6% year over year to $207.6 million while data revenue increased 9.1% year over year to $142.9 million. Network access revenue continues to contract with 8% year over year decline to $190.4 million.
Reported revenue from Embarq operation declined 7.9% year over year to $1.33 billion. Embarq derived income from continuing operation was $204 million, compared to $202 million reported a year-ago.

Total access lines at the end of the second quarter were 1,933,000 down 6.9% from 2,077,000 at the end of the same period last year and down 1.7% from previous quarter’s 1,967,000. High-speed Internet customers increased 12.2% year over year to over 681,000 with net new additions of approximately 16,000 customers registered during the quarter. Embarq registered 12,200 new high-speed Internet customer additions in the second quarter but lost 163,000 access lines.
CenturyLink paid a cash dividend of $0.70 per share in the second quarter leveraging healthy free cash flow which registered $140.1 million in the quarter, excluding non-recurring items and acquisition related capital expenditures.
The company has released its guidance for the third quarter of 2009 with projected consolidated revenue (including Embarq’s contribution) of $1.85-$1.89 billion and earnings per share of $0.78-$0.82. For full-year 2009, CenturyLink expects earnings per share to be in the range of $3.20-$3.30. Capital expenditure for the second-half of 2009 is projected at $525-$575 million, which includes spending related to Embarq properties and excludes one-time expenditures associated with the integration of Embarq.

Following the approval of the Federal Communications Commission (FCC) in Jun 2009, the company officially closed its acquisition of Embarq Inc on Jul 1, 2009 for $11.6 billion. The integrated company (CenturyLink) has emerged as one of the largest rural telecom carriers with roughly 7.5 million voice access lines, 440,000 video subscribers and 2.1 million broadband connections across 33 states. The acquisition will be accretive to CenturyLink’s free cash flow in 2010, the first full year following the acquisition.
While the merger with Embarq may ultimately yield a number of operational benefits and cost synergies, we believe significant integration challenges may impede financials for the remainder of 2009 and early 2010.
In our opinion, the growth momentum for the company’s broadband Internet business is more than offset by near-term revenue declines and higher cash outlays. Additionally, CenturyLink continues to experience precipitous erosion in access lines as it contends with intense competition from other service offerings such as Voice-over-Internet protocol (VoIP) services by cable TV operators.
Moreover, CenturyLink operates with a highly leveraged balance sheet which is further stretched with the assumption of $5.8 billion debt as a result of the acquisition of Embarq.

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