The third-largest U.S. landline operator CenturyLink Inc. (CTL) reported first quarter 2011 results on May 5. Adjusted earnings per share of 76 cents beat the Zacks Consensus Estimate by 4 cents. However, earnings were 17 cents lower than the year-earlier results.

First Quarter Review

CenturyLink generated disappointing revenues in the quarter due to sustained erosion in access lines and ongoing migration from fixed lines to wireless. The company is enjoying strong demand for its broadband business as reflected by consistent growth in subscriber base.

The company improved its liquidity position by reducing long-term debt by $0.15 billion and increasing cash and cash equivalents by $96.8 million.

Subsequent to the quarter end, CenturyLink completed its merger with Denver-based Qwest Communications. In late April, the company announced its intention to acquire an information technology services provider Savvis Inc. (SVVS) in order to enter the cloud computing business. The transaction will be completed in the second half of the year and is awaiting approval from antitrust regulators and Savvis shareholders.

Combining CenturyLink and Qwest operations, the company expects operating revenues in ranges of $4.40–$4.43 billion and $14.9–$15.1 billion for the second quarter and fiscal 2011, respectively. Earnings are expected to be 63 cents to 67 cents and $2.55 to $2.65 per share for the second quarter and fiscal 2011, respectively.

(Read our full coverage on this earnings report: CenturyLink Beats, Falls Y/Y)

Agreement of Analysts

Following the first quarter earnings, the analysts are skewed more toward the negative side in estimate revisions for the upcoming quarter and fiscal year. This trend was noticed over both the last 7 days and 30 days.

For the upcoming quarter, out of 10 analysts, 4 and 1 revised their estimates downward over the last 30 days and 7 days, respectively. Only 1 analyst made an upward revision in the last 7 days while none moved in the same direction in the last 30 days.

For fiscal 2011, 4 and 1 analysts out of 7 made downward revisions over the last 30 days and 7 days, respectively, while none moved in the opposite direction.

For fiscal 2012, out of 18 analysts, 4 and 1 revised their estimates downward over the last 30 days and 7 days, respectively. 3 analysts made upward revisions in both time spans.

The analysts are concerned about persistent erosion in access lines, migration of fixed-line to wireless services,competitive threats from cable TV operators and high debt levels.

Although CenturyLink reduced its debt in the reported quarter, the analysts still considered the level (roughly $7.2 billion) March 31, 2011 as high. Its debt position is further burdened with the assumption of Embarq and Qwest debt.

The integration of Qwest operations is a threat to the company and will increase operating costs going forward. The integration will incur approximately $650 million to $800 million of operating costs over three to five years and approximately $150 million to $200 million of one-time capital costs.

CenturyLink has to integrate several systems and procedures including re-branding, billing, management information, purchasing, payroll and benefits, fixed asset, lease administration and regulatory compliance. In addition, the combined company will have to expand its services to large urban areas where CenturyLink has limited operating experience.

Magnitude –– Consensus Estimate Trend

The Zacks Consensus Estimate for the second quarter declined to 67 cents from 68 cents over the last 7 days and 74 cents, respectively, over the last 30 days. The estimate represents a substantial 24.09% decline year over year.

Similarly, for fiscal 2011, the Zacks Consensus Estimate reduced to $2.74 from $2.83 over the last 7 days and $2.95 over the last 30 days. The estimate represents a 19.13% decline year over year.

For fiscal 2012, the Zacks Consensus Estimate remained static at $3.04 over the last 7 days but increased by 3 cents over the last 30 days. The estimate represents an increase of 10.87% annually.

The analysts expect earnings to accelerate in the upcoming years. They believe the company remains focused on investing in broadband services to expand network capacity and improving returns to its shareholders through healthy dividend payouts. CenturyLink continues to generate substantial benefits fromEmbarqand Qwest acquisitions and expects the pending Savvis acquisition to generate further synergies going forward.

The Qwest merger will generate annual synergies of approximately $625 million over the three to five years. The Savvis transaction is expected to be accretive to CenturyLink’s free cash flow in the initial year following closure and generate cost synergies of roughly $70 million.

Further, the acquisitions and mergers will provide CenturyLink a competitive edge over its two major rivals, AT&T Inc. (T) and Verizon Communications Inc. (VZ), with more operational efficiency in a mature U.S. home-phone market.

Earning Surprises

With respect to earnings surprises, the company’s fairly good track record is expected to continue in the coming quarters. CenturyLink produced a positive average earnings surprise of 2.94% over the last four quarters, which suggests that it outpaced the Zacks Consensus Estimate by that amount over the last year.

Neutral Recommendation

We believe the growth momentum for the company’s broadband Internet business was more than offset by losses in the fixed voice access lines. While the merger with Embarq and Qwest as well as the pending Savvisacquisition may yield a number of operational benefits and cost synergies, significant integration challenges may impede operating performance ahead. Thus, we are maintaining our long-term Neutral recommendation on CenturyLink. 

For the short term, we remain cautious on the carrier’s high debt exposure, which addsa degree of operating risk. Coupled with competitive threats and persistent access lines erosions, we have a Sell rating with a Zacks #4 Rank.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/


 
CENTURYTEL INC (CTL): Free Stock Analysis Report
 
SAVVIS INC (SVVS): Free Stock Analysis Report
 
AT&T INC (T): Free Stock Analysis Report
 
VERIZON COMM (VZ): Free Stock Analysis Report
 
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