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CenturyLink Reports Third Quarter 2012 Earnings

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Achieved operating revenues of $4.57 billion, in line with guidance

Improved year-over-year rate of revenue decline to 1.3% in third quarter 2012 compared to 4.6% year-over-year decline in pro forma[1] third quarter 2011

Realized strong growth in high-speed Internet subscribers of more than 44,000 during third quarter 2012

Achieved Adjusted Diluted EPS[1, 2] of $0.66 compared to $0.61 in pro forma third quarter 2011

Generated Free Cash Flow[2] of $905 million, excluding special items

MONROE, La., Nov. 7, 2012 /PRNewswire/ -- CenturyLink, Inc. (NYSE: CTL) today reported strong operating revenues, operating cash flow and free cash flow for third quarter 2012.

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"CenturyLink's  third quarter results reflect our continued progress toward top line revenue stabilization, successful integration of the Qwest and Savvis operations and alignment of our operating costs with our revenue and growth opportunities," said Glen F. Post, III, chief executive officer and president.

"Our Enterprise Markets-Network team achieved recurring revenue growth for the third straight quarter driven by solid customer retention and the increasing revenue contribution from enterprise customers added earlier this year. We continue to see strong demand for network services from enterprise customers as we recorded solid quarterly bookings and exited the quarter with a strong sales funnel.

"Our strategic revenues continued to increase in our Regional Markets and Enterprise Markets operations; however, as previously discussed, we did experience modest strategic Wholesale Markets revenue compression as wireless carriers continue to migrate from copper-based to fiber-based connections.

"We are pleased with the continued progress we made during the third quarter toward stabilizing top-line revenue and we believe our continued investment in our key strategic opportunities will help drive enhanced shareholder value," Post said.

Third Quarter Highlights

  • Improved year-over-year actual-to-pro forma revenue trend to a 1.3% rate of decline (1.4% rate of decline excluding data integration revenue), compared to a 4.6% decline in pro forma third quarter 2011.
  • Achieved free cash flow of $905 million, excluding special items and integration-related capital expenditures.
  • Added more than 44,000 high-speed Internet customers; ended third quarter 2012 with over 5.8 million subscribers[3].
  • Reduced access line loss by 22% compared to third quarter 2011, as the line loss trend improved during third quarter 2012 to a 5.8% annual decline compared to a 7.1% annual decline in third quarter 2011.
  • Expanded the number of Prism™ TV subscribers by 11% in third quarter 2012 from second quarter 2012, ending the quarter with more than 104,000 subscribers in service.
  • Generated sequential recurring revenue growth in our Enterprise Markets - Network and Enterprise Markets - Data Hosting segments.
  • Opened a data center[4] in Singapore, bringing total data centers to 53 throughout North America, Europe and Asia, with total sellable floor space of approximately 1.4 million square feet.

Consolidated Third Quarter Financial Results

Operating revenues for third quarter 2012 were $4.57 billion compared to $4.60 billion in third quarter 2011. This decrease was driven by lower legacy services revenues primarily due to the impact of access line losses and lower access revenues partially offset by $58 million of incremental revenue contributions from the Savvis acquisition completed July 15, 2011 and increases in strategic revenues, primarily resulting from business customer demand for high-bandwidth data services and growth in high-speed Internet and Prism™ TV subscribers.

Comparing pro forma 2011 to third quarter 2012, operating revenues declined 1.3% from $4.63 billion a year ago to $4.57 billion this quarter, due to the decline in legacy revenues more than offsetting the increase in strategic revenues as discussed above.

Operating expenses, excluding special items, decreased to $3.86 billion from $3.94 billion in third quarter 2011, primarily due to lower personnel-related costs, operating taxes and depreciation and amortization expense, partially offset by $50 million of incremental operating costs associated with the Savvis acquisition included in the current quarter.

Comparing pro forma 2011 to third quarter 2012, operating expenses, excluding special items, decreased to $3.86 billion in third quarter 2012 from pro forma third quarter 2011 operating expenses of $3.98 billion.

Operating cash flow (as defined in our attached supplemental schedules), excluding special items, increased slightly to $1.90 billion from $1.88 billion in third quarter 2011, primarily due to lower personnel-related costs and the Savvis acquisition contribution to operating cash flow, which was partially offset by the decline in legacy revenues. For third quarter 2012, CenturyLink achieved an operating cash flow margin, excluding special items, of 41.5% versus 41.0% in third quarter 2011.

Third quarter 2012 operating cash flow of $1.90 billion, excluding special items, was flat from pro forma third quarter 2011. Operating cash flow margin, excluding special items, was 41.5% in third quarter 2012 compared to 40.9% in pro forma third quarter 2011.

Adjusted Net Income and Adjusted Diluted Earnings Per Share (Adjusted Diluted EPS)

Adjusted Net Income and Adjusted Diluted EPS exclude the after-tax impact of special items, the non-cash after-tax impact of the amortization of intangibles, and the non-cash after-tax impact to interest expense of the assignment of fair value to debt outstanding related to the Embarq, Qwest and Savvis transactions.

Excluding the items outlined above, CenturyLink's Adjusted Net Income for third quarter 2012 was $413 million compared to pro forma Adjusted Net Income of $377 million in third quarter 2011. Third quarter 2012 Adjusted Diluted EPS was $0.66 compared to pro forma Adjusted Diluted EPS of $0.61 in the year-ago period. See the attached schedules for additional information.

GAAP Results – Third Quarter

Under generally accepted accounting principles (GAAP), net income for third quarter 2012 was $270 million compared to $138 million for third quarter 2011, and diluted earnings per share for third quarter 2012 was $0.43 compared to $0.22 for third quarter 2011. Third quarter 2012 net income and diluted earnings per share reflect $33 million ($0.05 per share) due to a favorable out-of-period adjustment to depreciation expense related to the fair value previously assigned to Embarq plant assets, an income tax benefit from the reversal of a valuation allowance and a gain on the sale of a non-operating investment, which were partially offset by severance, integration and retention costs associated with the Embarq, Qwest and Savvis acquisitions and severance associated with recent expense reduction initiatives.  

Third quarter 2011 net income and diluted earnings per share reflect after-tax integration, severance, and retention costs associated with the Embarq, Qwest and Savvis acquisitions of $70 million ($0.12 per share).

Segment Results / Highlights

Regional Markets
The Regional Markets segment continued to improve revenue and access line trends in local markets by leveraging CenturyLink's local operating model.

  • Strategic revenues were $912 million in the quarter, a 7.9% increase over pro forma third quarter 2011. Excluding the impact of private line services, the adjusted growth rate was more than 9%.
  • Generated $2.47 billion in total revenues, a decrease of 2.1% from pro forma third quarter 2011, reflecting the continued decline in traditional legacy services tempered by Access Recovery Charges implemented effective July 1, 2012 in accordance with the CAF Order[5].
  • Achieved strong business strategic data and network managed services growth.
  • Added more than 10,000 Prism™ TV subscribers during third quarter with over 90% attachment rate of broadband services.

Wholesale Markets
The Wholesale Markets segment strategic revenues declined modestly from pro forma third quarter 2011 primarily due to wireless carrier migration from private line to Ethernet services. The Company is progressing well in its fiber-to-the-tower builds and currently expects to complete 4,000 to 4,500 fiber builds in 2012.

  • Strategic revenues were $568 million in the quarter, slightly lower than pro forma third quarter 2011, driven by wireless carrier bandwidth expansion and higher Ethernet sales offset by declines in copper-based revenue.
  • Generated $908 million in total revenues, a decrease of 7.6% from pro forma third quarter 2011, reflecting the implementation of the CAF Order rate reduction and continued decline in legacy services primarily driven by lower long distance and switched access minutes of use associated with access line loss and displacement of access minutes by alternative forms of communication.
  • Completed approximately 1,335 fiber builds during the third quarter and more than 3,300 year-to-date, ending the quarter with approximately 13,500 fiber-connected towers.

Enterprise Markets – Network
The Enterprise Markets – Network segment achieved solid growth in recurring revenue sales in the third quarter.

  • Strategic revenues were $341 million in the quarter, a 7.2% increase over pro forma third quarter 2011 driven by strength in high-bandwidth offerings such as MPLS[6] and Ethernet services. Excluding the impact of private line services, the adjusted growth rate was more than 13%.
  • Generated $658 million in total revenues, an increase of 5.6% from pro forma third quarter 2011, reflecting growth in high-bandwidth offerings and data integration revenues partially offset by declines in legacy services revenues.
  • Achieved a third straight quarter of sequential recurring revenue growth.

Enterprise Markets – Data Hosting
The Enterprise Markets – Data Hosting segment (primarily Savvis operations) grew managed hosting (including cloud) and colocation services revenue, with strength in core managed hosting products and in the financial and media verticals.

  • Operating revenues were $280 million in the quarter, an 8.1% increase from pro forma third quarter 2011. Colocation revenues were $113 million, a 7.6% increase from pro forma third quarter 2011, and managed hosting revenues were $107 million, representing a 9.2% increase over the same period a year ago.
  • Continued to expand global geographic reach in key markets with opening of new data center in Singapore and expansion of data center in New York/New Jersey market.
  • Closed acquisition of certain assets of Ciber's IT Outsourcing (ITO) business in mid-October, which enhances and expands CenturyLink's capabilities in areas such as application-management services and help-desk support.
  • Announced in October forthcoming launch of savvisdirect[7], expanding CenturyLink's portfolio of cloud services to businesses of all sizes.

Integration Update

During third quarter 2012, CenturyLink incurred pre-tax integration, severance and retention costs of $17 million ($10 million net after-tax) related to the Embarq, Qwest and Savvis acquisitions.

CenturyLink ended third quarter 2012 with an annualized operating expense synergy run rate of approximately $450 million from the Qwest acquisition. CenturyLink currently expects to exit 2012 with approximately $480 million in annual run-rate synergies related to the Qwest acquisition as operating expense savings are being achieved earlier than anticipated.

Guidance – Fourth Quarter 2012 and Full Year 2012

The Company expects fourth quarter 2012 operating cash flow to increase compared to third quarter 2012 due to anticipated continued growth in strategic revenues and lower outside plant maintenance and utility costs.

Fourth Quarter 2012

   

Operating Revenue

$4.56 to $4.61 billion

Operating Cash Flow (excl special items)

$1.90 to $1.94 billion

Adjusted Diluted EPS (excl special items)

$0.64 to $0.69

   

Full Year 2012

Previous Guidance

Current Guidance

Operating Revenue

$18.3 to $18.4 billion

$18.35 to $18.4 billion

Operating Cash Flow (excl special items)

$7.5 to $7.65 billion

$7.64 to $7.68 billion

Adjusted Diluted EPS (excl special items)

$2.45 to $2.55

$2.64 to $2.69

Capital Expenditures[8]

$2.7 to $2.8 billion

$2.75 to $2.85 billion

Free Cash Flow (excl special items)

$3.25 to $3.4 billion

$3.3 to $3.4 billion

2013 Outlook

CenturyLink's operating and capital investment in its key strategic initiatives is driving strategic revenue growth and the Company expects to continue to invest in these key initiatives in the future.

CenturyLink anticipates further improvement in top line revenues in 2013, currently expecting the annual rate of revenue decline for full year 2013 compared to full year 2012 to be in the -0.5% to -1.5% range. Additionally, the Company expects to reach top line revenue stabilization in 2014.  Similar to what the Company anticipates experiencing in 2012, operating and free cash flows are anticipated to be lower in 2013 primarily due to the Company's continued shift in its legacy and strategic revenue mix and investment in key strategic initiatives. In addition, the Company expects a lower level of incremental synergies in 2013 compared to the level of incremental synergies anticipated to be achieved in 2012.

CenturyLink expects to provide 2013 guidance in mid-February when it reports fourth quarter and full year 2012 results.

All 2012 guidance figures and 2013 outlook statements included in this release (i) speak as of November 7, 2012 only, (ii) include the impact of the Ciber ITO assets acquired on October 15, 2012, and (iii) exclude the effects of special items, future changes in regulation or accounting rules, integration expenses associated with the Qwest, Savvis and Ciber acquisitions, any changes in operating or capital plans and any future mergers, acquisitions, divestitures, buybacks or other similar business transactions. See "Forward Looking Statements" below.

Investor Call

As previously announced, CenturyLink's management will host a conference call at 4:00 p.m. Central Time today, November 7, 2012. Interested parties can access the call by dialing 866-244-4518. The call will be accessible for replay through November 14, 2012, by calling 888-266-2081 and entering the access code 1592908. Investors can also listen to CenturyLink's earnings conference call and replay by accessing the Investor Relations portion of the Company's Web site at www.centurylink.com through November 28, 2012.

Reconciliation to GAAP

This release includes certain non-GAAP financial measures, including but not limited to operating cash flow, free cash flow, adjustments to GAAP measures to exclude the effect of special items and certain pro forma combined operating results. In addition to providing key metrics for management to evaluate the Company's performance, we believe these measurements assist investors in their understanding of period-to-period operating performance and in identifying historical and prospective trends. Reconciliations of non-GAAP financial measures to the most comparable GAAP measures are included in the attached financial schedules. Reconciliation of additional non-GAAP financial measures that may be discussed during the earnings call described below will be available in the Investor Relations portion of the Company's Web site at www.centurylink.com. Investors are urged to consider these non-GAAP measures in addition to, and not in substitution for, measures prepared in accordance with GAAP.

About CenturyLink

CenturyLink is the third largest telecommunications company in the United States and is recognized as a leader in the network services market by technology industry analyst firms. The Company is a global leader in cloud infrastructure and hosted IT solutions for enterprise customers. CenturyLink provides data, voice and managed services in local, national and select international markets through its high-quality advanced fiber optic network and multiple data centers for businesses and consumers. The company also offers advanced entertainment services under the CenturyLink™ Prism™ TV and DIRECTV brands. Headquartered in Monroe, La., CenturyLink is an S&P 500 company and is included among the Fortune 500 list of America's largest corporations. For more information, visit www.centurylink.com.

Forward Looking Statements

Certain non-historical statements made in this release and future oral or written statements or press releases by us or our management are intended to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations only, and are subject to a number of risks, uncertainties and assumptions, many of which are beyond our control. Actual events and results may differ materially from those anticipated, estimated or projected if one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect. Factors that could affect actual results include but are not limited to: the timing, success and overall effects of competition from a wide variety of competitive providers; the risks inherent in rapid technological change; the effects of ongoing changes in the regulation of the communications industry (including recent reforms and changes by the Federal Communications Commission regarding intercarrier compensation and the Universal Service Fund, among other things); our ability to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages; our ability to effectively adjust to changes in the communications industry and changes in the composition of our markets and product mix caused by our recent acquisitions; our ability to successfully integrate recently acquired operations into our incumbent operations, including the possibility that the anticipated benefits from our recent acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or costly than anticipated; our ability to use the net operating loss carryovers of Qwest in projected amounts; our ability to effectively manage our expansion opportunities, including retaining and hiring key personnel; possible changes in the demand for, or pricing of, our products and services; our ability to successfully introduce new product or service offerings on a timely and cost-effective basis; our continued access to credit markets on favorable terms; our ability to collect our receivables from financially troubled communications companies; any adverse developments in legal proceedings involving us; our ability to pay a $2.90 per common share dividend annually, which may be affected by changes in our cash requirements, capital spending plans, cash flows or financial position; unanticipated increases or other changes in our future cash requirements, whether caused by unanticipated increases in capital expenditures, increases in pension funding requirements or otherwise; the effects of adverse weather; other risks referenced from time to time in our filings with the Securities and Exchange Commission (the "SEC"); and the effects of more general factors such as changes in interest rates, in tax rates, in accounting policies or practices, in operating, medical, pension or administrative costs, in general market, labor or economic conditions, or in legislation, regulation or public policy. These and other uncertainties related to our business and our recent acquisitions are described in greater detail in Item 1A to our Form 10-K for the year ended December 31, 2011, as updated and supplemented by our subsequent SEC reports. You should be aware that new factors may emerge from time to time and it is not possible for us to identify all such factors nor can we predict the impact of each such factor on the business or the extent to which any one or more factors may cause actual results to differ from those reflected in any forward-looking statements. You are further cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this release. We undertake no obligation to update any of our forward-looking statements for any reason.

[1] See the attached pro forma statements of income for more information about our pro forma results discussed in this release.
[2] See attachments for non-GAAP reconciliations.
[3] Effective second quarter 2012, CenturyLink modified its high-speed Internet reporting to include consumer, business and wholesale subscribers instead of only consumer and small business subscribers.
[4] We define a "data center" as any facility where we market, sell and deliver either colocation services or multi-tenant managed services, or both.
[5] Federal Communications Commission's Connect America and Intercarrier Compensation Reform Order (the CAF Order) adopted on October 27, 2011
[6] Multiprotocol Label Switching
[7] savvisdirect is CenturyLink's highly scalable and easy-to-use cloud services platform designed for business of all sizes that is immediately accessible to business users, IT administrators and developers through an intuitive, user-friendly Web portal
[8] Excludes approximately $65 million of integration-related capital expenditures