CenturyLink legacy declines drag revenue down to $4.52B

CenturyLink (NYSE: CTL) reported that despite strong gains in broadband, IPTV and business Ethernet, Q3 2013 operating revenues declined 1 percent year-over-year to $4.52 billion due to ongoing access line losses and lower access results.

These losses were "partially offset" by strategic business service revenues like Ethernet and an increase in broadband Internet and Prism TV subscribers.

In addition to the declines in its legacy segment, the service provider's results were impacted by a $1.1 billion non-cash goodwill impairment related to its data hosting segment.

Glen Post, president and CEO, said during the earnings call that "the impairment was related to goodwill assigned to the data hosting segment and it was primarily due to our recent performance impacted into the development of growth projections used for calculating impairment."

Here's a breakdown of CenturyLink's key segment metrics:

Consumer: Growth in Prism TV and broadband subscribers drove up strategic revenues 6.8 percent year-over-year to $644 million. During the quarter, the service provider added 33,000 new broadband and 17,000 Prism IPTV subscribers. However, total consumer revenues declined 2.1 percent year-over-year to $1.5 billion, a factor it says reflects the ongoing decline in legacy services.

As seen in previous quarters, customers who subscribed to a triple play bundle of voice, video and data had a lower propensity to churn.

"Over 50 percent of these added customers are new to CenturyLink and they continue to have a high rate of broadband attachment," said Post. "Now this quarter we expect a record level of 98 percent attachment rate."

To make its IPTV offering more compelling, Post added that they introduced "new functionality and applications including expansion of our TV Everywhere capabilities, video-on-demand library and a recent successful trial of wireless set-top boxes."

The service provider also made progress with its 1 Gbps fiber to the home (FTTH) trial in Omaha. During the quarter, it deployed GPON-based services to over 40,000 homes in the city and expects to reach almost 50,000 homes in the fourth quarter. It also announced Las Vegas as the second city for its 1 Gbps trial.

"We are very encouraged of these early results in Omaha and we announced in October that we'll expand our fiber network to Las Vegas enabling Internet speed to up to 1 gig to small businesses and select neighborhoods in that market," said Post.

Business: Similar to the consumer segment, sales of strategic services such as MPLS and Ethernet were the key growth drivers, rising 6.3 percent to $640 million. Taking out the impact of lower bandwidth services such as T1 access, CenturyLink said the "adjusted growth rate was approximately 9 percent."

Total business revenues remained flat year-over-year at $1.54 billion as growth from higher bandwidth services helped to offset lower legacy services and data integration revenues. Legacy service revenues declined 3.8 percent to $742 million, which it said was related to eroding access line and long distance revenues that were partially mitigated by an increase in the excess recovery charge.

The service provider plans to capitalize on its growing set of fiber assets, including its advanced MTU and GPON, to deliver higher speed Ethernet and cloud services. Post said that during the quarter, it "added 400 fiber-fed buildings, increasing the number of fiber-fed buildings by 40 percent."

In areas where it does not currently offer its advanced multi-tenant unit (MTU) or GPON services, it will continue to deploy Ethernet services, including Ethernet over Copper (EoC) to businesses.

Post said that they currently cover "over 2 million business locations with Ethernet capability with nearly half of this footprint capable of 20 megabits and higher symmetrical speeds."

Wholesale: This segment was driven by gains in strategic services, including fiber-based wireless backhaul services it provides to wireless operators. It reported that strategic revenues dropped to $563 million year-over-year due to a decline in copper-based revenue, partially offset by increases in higher wireless carrier bandwidth and sales of Ethernet services. Overall revenues declined 3.5 percent to $878 million, which it attributes to lower long distance and switched access minutes of use and access rate reductions.

On the wireless backhaul front, the telco completed 1,200 fiber builds and expects to complete 3,500 to 4,000 fiber builds in full-year 2013. This buildout plan is lower than its previous estimate of 4,000 to 5,000 sites because of construction delays by wireless operators.

Despite the progress it is making with wireless backhaul, the transition from copper to fiber and Ethernet continues to be a drag on overall wholesale revenues.

"As expected, we continue to experience some revenue compression as our wireless wholesale customers' transition from copper-based DS1 facilities to fiber-based Ethernet services," Post said. "However, we anticipate that wireless data bandwidth growth will result in the expansion of Ethernet consumption and thereby reverse the current revenue compression during 2014."

Data Hosting: Operating revenues were $342 million, up 4.6 percent year-over-year. Colocation revenues rose 1.4 percent year-over-year to $146 million, while managed hosting revenues rose 15 percent year-over-year to $129 million.

During the quarter, Post said CenturyLink had "about 20,000 square feet of sellable data center floor space through the expansion of existing facilities in three markets," adding that "we've added approximately 80,000 sellable square feet."

The service provider has forecast Q4 2013 operating revenues of $4.50 to $4.55 billion and core revenues of $4.07 to $4.12 billion. It added that fourth quarter expenses will increase sequentially over Q3 2013 due to higher data integration costs related to an anticipated increase in customer premise equipment sales.

Shares of CenturyLink were listed at $33.89 at the end of trading Wednesday afternoon on the New York Stock Exchange.

For more:
- see the earnings release
- and the earnings transcript (reg req.)

Earnings summary: Wireline telecom earnings in the third quarter of 2013

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