Why Is CenturyLink (CTL) Down 2.5% Since its Last Earnings Report?

A month has gone by since the last earnings report for CenturyLink, Inc. CTL. Shares have lost about 2.5% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is CTL due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

CenturyLink Q1 Earnings Top Estimates, Revenues Miss

CenturyLink reported mixed financial results for the first quarter of 2018, the first full quarter of operations following the acquisition of Level 3.    

Net Income

On a GAAP basis, net income for the reported quarter came in at $115 million or 11 cents per share compared with $163 million or 30 cents per share in the year-ago quarter. The year-over-year decrease in earnings despite higher revenues was primarily driven by higher operating expenses. The company’s adjusted earnings were 25 cents per share, which comfortably surpassed the Zacks Consensus Estimate of 15 cents.

Revenues

Total operating revenues increased 41% year over year to $5,945 million, due to incremental revenues from Level 3. The top line, however, missed the Zacks Consensus Estimate of $5,963 million.

Operating Metrics

Quarterly operating expenses totaled $5,195 million, up 45% year over year. Operating income improved 19% to $750 million. Operating income margin was 12.6% compared with 15% in the year-ago quarter. Adjusted EBITDA decreased to $2,074 million from $2,140 million in the year-ago quarter, due to an increase in payroll taxes and integration-related expenses. Adjusted EBITDA margin was 34.9% compared with 35.4% in the prior-year quarter.    

As of Jan 1, 2018, the company adopted the new revenue recognition standard, ASC 606. Overall, the adoption of this new standard negatively affected total revenues by approximately $15 million in the quarter, with $5 million in Business and $10 million in Consumer.

Q1 Segmental Performance

Total revenues from Business segment were $4,383 million compared with Pro Forma revenues of $4,429 million in the year-ago quarter. The sales figure was affected by slower sales and the adoption of the new revenue recognition standard.  

Consumer segment revenues were $1,379 million compared with Pro Forma revenues of $1,447 million in the first quarter of 2017. The company incurred a net loss of about 58,000 broadband subscribers in the reported quarter.  

By Business Unit, Medium & Small business revenues were $860 million, while Enterprise revenues were $1,315 million. By Service Type, IP & Data services generated $1,845 million, while Transport & Infrastructure and Voice & Collaboration revenues were $2,118 million and $1,637 million, respectively.

Cash Flow

For the first three months of 2018, CenturyLink generated $1,667 million of cash from operations compared with $1,057 million in the prior-year period. Free cash flow was $862 million compared with $448 million in the first quarter of 2017.  

Liquidity

As of Mar 31, 2018, CenturyLink had $501 million of cash and cash equivalents while long-term debt was $36,940 million.

Full-Year 2018 Outlook

For 2018, CenturyLink has reiterated its adjusted EBITDA and free cash flow outlook. Adjusted EBITDA is anticipated in the range of $8.75-$8.95 billion. Free cash flow is expected in the range of $3.15-$3.35 billion. Free cash flow after dividends is projected between $0.85 billion and $1.05 billion. Capital expenditures are likely to be around 16% of revenues.

However, the company has reduced its outlook for depreciation and amortization to $5.1-$5.3 billion from $5.4-$5.5 billion, due to valuation adjustments related to purchase price accounting. It received an anticipated tax refund of $314 million after the close of the just reported quarter.

Positioned as one of the world's leading network providers, management believes that there are significant opportunities to grow business and drive long-term shareholder value. It remains focused on sales force integration and driving profitable revenue growth while improving customer experience.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter compared to one lower. Last month, the consensus estimate has shifted by 28.5% due to these changes.

CenturyLink, Inc. Price and Consensus

 

CenturyLink, Inc. Price and Consensus | CenturyLink, Inc. Quote

VGM Scores

At this time, CTL has a subpar Growth Score of D, however its Momentum is doing a lot better with an A. Following the exact same course, the stock was also allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and momentum investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Interestingly, CTL has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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