Comment & Analysis of Century Link’s 2nd Quarter results

Century Link today reported second quarter 2017 results. The company:

– Achieved second quarter operating revenues of approximately $4.1 billion

– Generated operating income of $367 million in second quarter, which reflects approximately $150 million of one-time charges related to the sale of the data centers and co-location business on May 1, 2017 (Co-location Sale)

– Generated adjusted EBITDA of $1.44 billion in second quarter, excluding special items

– Revenue for the quarter fell 7.0% to $4.09 billion, which was down from $4.40 billion last year.

– Continued to invest to drive higher broadband speeds throughout its network footprint.

– Ended the quarter with more than 3.8 million addressable units capable of speeds of 100M bits/s or higher and more than 1.5 million addressable units capable of 1G bits/s or higher

– Continue to anticipate completion of the acquisition of Level 3 Communications by end of September 2017

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Author’s Comment:

Negative surprises (see Presentation section below):

1. Year over year (y/y) decline in Carrier Ethernet revenue, yet solid growth in (older) MPLS revenue is quite puzzling.

2. 10.1% decline in enterprise legacy services revenues due to lower voice and low-bandwidth data services revenues.

3. Fewer consumer broadband subscribers in past year. Strategic consumer revenue decreased 4.0% Y/Y – impact of satellite contract restructuring in 1Q and lower
broadband units. Consumer legacy revenue declined 8.8% Y/Y – lower access lines.

Positive surprises:

1. Enterprise strategic revenues (not including co-lo sales) grew 4% while high-bandwidth data services revenues increased 5% Y/Y.

2. Operating expenses for enterprise segment declined $87 million, or 6.3%, Y/Y – sale of co-location business reduced operating expenses ~$60 million; reduction
in employee-related expenses.

3. Operating expenses for consumer segment declined $47 million, or 7.4%, Y/Y – lower employee-related expenses.

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Most astonishing to me was that the Century Link executives did not even mention their public cloud computing business, which was heavily promoted in 2011 when the company acquired Savvis. We assume the company’s entertainment video business results were included in the consumer segment, but they were not separately disclosed.

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Century Link CEO Comments:

“We are confident our continued investment in high-quality, high-bandwidth broadband network infrastructure positions Century Link well for long-term growth,” said Glen F. Post, III, Century Link chief executive officer and president.

“Enterprise demand for high-bandwidth data services remains strong and, while consumer broadband units were weaker than expected, we are encouraged by the higher-value customers our improved offerings are attracting. We accelerated our capital investment in high-bandwidth services and broadband infrastructure during the second quarter, which we believe better positions us to increase revenues in the second half of 2017 and beyond. We anticipate second half and full year 2017 capital expenditures of approximately $1 billion and $2.6 billion, respectively.

“We achieved our expected adjusted EBITDA for the quarter as our employees did a great job managing costs, while core revenues were below our expectations primarily due to the decline in legacy revenues and the decline in broadband units being higher than anticipated. We continue to make good progress in obtaining the necessary approvals for the pending Level 3 acquisition, having received clearance in 23 of 25 required states and territories. Integration planning is progressing well and we continue to anticipate completing the acquisition by the end of September 2017. We remain excited about the value we believe this transaction will create for our customers, our shareholders and our employees,” concluded Mr. Post.

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Century Link’s presentation – 2ndQ 2017 Highlights & Trends:

1. Strategic services:
◦ Enterprise high-bandwidth data – solid growth in MPLS revenue offset by decline in Ethernet revenue; grew 5% Y/Y on a normalized basis
◦ IT & Managed services – continued growth in IT Services along with stabilization of managed hosting revenue
◦ Enterprise other strategic – ~$100 million Y/Y and Q/Q decline due to Colo-cation sale
◦ Consumer broadband – fewer subscribers Y/Y
◦ Consumer video – impact of satellite video contract restructuring

2. Acquisition of Level 3 Communications:
◦ Continued good progress in obtaining necessary approvals; received shareholder
approval and regulatory approvals/clearances in 23 states or territories, with 2 states
remaining
◦ Integration planning process continues to go well; remain confident with cash synergy target of $975 million
◦ Named combined company senior leadership team, effective at close; overall
organization design progressing well
◦ Continue to anticipate closing by end of September 2017

Forward Guidance:

Based on first half 2017 results and current expectations for the remainder of the year, Century Link anticipates coming in slightly below its full-year 2017 revenue and adjusted diluted EPS guidance, primarily driven by higher legacy revenue declines and lower consumer broadband revenue growth than anticipated. The company continues to expect adjusted EBITDA and adjusted free cash flow to be near the lower end of prior guidance.

Century Link is not providing updated guidance ranges for full-year 2017 due to the pending acquisition of Level 3, currently anticipated to be completed by the end of third quarter of 2017, and the expected consolidation of results for the combined companies in fourth quarter 2017.

Earnings Call:

The call will be accessible for replay through August 9, 2017, by dialing 855-859-2056. Investors can also listen to Century Link’s earnings conference call and webcast replay by accessing the Investor Relations portion of the company’s website at www.centurylink.com through August 24, 2017. Here are a few highlights:

First, we continue to outperform MPLS market growth projections forecasted by leading industry analysts. In second quarter, we had nearly 2,000 MPLS customers. This performance was driven in particular by our SMB customers, where we are seeing improved install intervals of nearly 20%, which should help accelerate our revenue recognition as we move into the third and fourth quarters of this year. Next, we launched a number of new products and – we’ve launched a number of new products in the past few months including our CenturyLink Ethernet service.

We’ve also had three simplified bundles of SD-WAN plus network packages. We rolled out a competitively priced cloud-enabled small business VoIP offering. And we rolled out a new comprehensive managed Enterprise offering that is an end-to-end solution that includes WiFi management, network management, video surveillance, security and mobility management, all from a single interface. Also we have increased focus on customer retention and we are seeing lower credits and adjustments as a result.

In addition, CenturyLink continues to be one of the leaders in network virtualization through the deployment of software-defined networking and network virtualization capabilities. Based on initial results, we expect these services to create significant value in the months ahead. Also the continuous onslaught of new security threats, such as WannaCry has brought greater interest in and sales of our strong network and cyber security capabilities, as we believe CenturyLink is growing in recognition as a leading provider of security services that are so important to our Enterprise customers.

And lastly, based on third-party research support, U.S. Enterprise high-bandwidth data services are forecast to grow at mid-single-digit compounded annual growth rates through 2021, and U.S. Enterprise Managed Network Services are forecast to grow at mid to upper single-digit compounded annual growth rates through 2021. Now this forecast gives even more confidence in the opportunity to continue to grow Enterprise business in the months ahead.

Second, our IT services revenue, which is primarily driven by IT consulting, cyber security, IT service management and big data and analytics, is growing. And our managed hosting business also showed a solid turnaround this quarter. The team overcame the market confusion and sales disruption created by the colocation sale and grew cloud revenue, especially driven or aided by our Cloud Application Manager suite.

Next as expected, we had a seasonally challenging quarter from consumer broadband subscribers approximately 65,000 residential subscriber loss was higher than anticipated. This was driven to a great degree of our stronger cable competition, particularly 1 gig offerings in some of our key markets, coupled with aggressive pricing. Over the past year, we have made a pivot towards higher-quality, more profitable consumer broadband sales by removing several low-priced promotional offers and increased credit standards.

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References:

http://ir.centurylink.com/Cache/1500102071.PDF?O=PDF&T=&Y=&D=&FID=1500102071&iid=4057179

http://ir.centurylink.com/Cache/1500102077.PDF?O=PDF&T=&Y=&D=&FID=1500102077&iid=4057179

http://services.choruscall.com/links/ctl170802.html

http://www.centurylink.com/business/enterprise/cloud/public-cloud.html

https://techblog.comsoc.org/2017/05/24/centurylinklevel-3-says-its-fiber-assets-will-attract-smbs/