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Tickers in this Article: CTL, LEAP
CenturyLink Inc. (CTL) reported second quarter 2012 adjusted earnings of 65 cents per share beating the Zacks Consensus Estimate of 61 cents but deteriorating from the  year-ago earnings of 69 cents. The downfall was due to lower legacy voice and access revenues, arising from the loss of customers and lower minute's usage that clouded over higher strategic revenues. Adjusted earnings per share exclude the impact of special items related to the non-cash effect of the amortization of intangibles, interest expense of the assignment of fair value to debt outstanding related to Embarq, Qwest and Savvis transactions, acquisition-related adjustments and special items related to the income tax rate.

Quarterly revenue increased 4.7% year over year to $4,612 million, beating the Zacks Consensus Estimate of $4,572 million.

Segment Results

Regional Markets revenues declined 2.5% year over year to $2.4 billion in the reported quarter. Slowdown in the legacy business was mainly responsible for the decline.

Wholesale Markets revenue was $944 million in the second quarter, down 3.7% year over year, mainly due to lower switch access revenue as most subscribers are substituting their fixed line services with wireless and VoIP technology services.

Enterprise Markets - Network generated revenues of $648 million in the reported quarter, up 2.9% on a year-over-year basis. The growth was fueled by recurring revenue sales.

Enterprise Markets - Data Hosting revenue increased 6.5% year over year to $277 million driven by growth in managed hosting, cloud services, colocation alongside financials and consumer solutions.

Subscribers

At the end of the second quarter, total access lines were 14.15 million compared with 15.1 million in the year-ago quarter. CenturyLink added 18,000 high-speed Internet customers during the reported quarter, thus bringing the total to 5.76 million (up 4.4% year over year).

Liquidity

CenturyLink exited the second quarter with $281 million of cash and cash equivalents compared with $128 million at the end of fiscal 2011. Long-term debt decreased to $19.7 billion from $21.4 billion at year-end 2011.

The company generated operating cash flow of $1.90 billion in the second quarter compared with $1.92 billion in the year-ago quarter, as cash flows generated from Savvis' revenue contribution were offset by the decline in legacy revenues.

Guidance

For the third quarter of 2012, CenturyLink projects revenues and earnings per share in the bands of $4.54-$4.59 billion and 54-59 cents, respectively. Operating cash flow is expected in the range of $1.82-$1.86 billion.

For full year 2012, CenturyLink expects revenues in the range of $18.2-$18.4 billion and earnings in the range of $2.45-$2.55. Operating cash flow is expected in the range of $7.5-$7.65 billion. Free cash flow is expected in the range of $3.25-$3.4 billion and capital expenditures between $2.7 billion and $2.8 billion.  

Our Analysis                                                                             

CenturyLink has successfully undertaken integration and operation of the Embarq properties, mitigating the rate of access line loss and meeting customer demand for high-speed Internet and high-bandwidth services. We believe that the Qwest and Savvis acquisitions will significantly enhance CenturyLink's position as a global communications leader and strengthen its ability to drive long-term shareholder value. However, significant integration challenges as well as increased operating expenses resulting from the acquisitions may impede operating performance going forward. In addition, the company faces competition from peers like Leap Wireless International Inc. (LEAP).

We have a long-term Neutral recommendation on the stock. For the short term (1-3 months), CenturyLink retains a Zacks #3 Rank (Hold).

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