CenturyLink, Level 3 Q2 results to be challenged by enterprise secular pressures, says Jefferies

A map of CenturyLink and Level 3's network

CenturyLink and Level 3’s second-quarter earnings may show the industry-wide pricing and competitive pressures all service providers are facing in the business enterprise market.

While these near-term issues will impact each of these service provider’s second-quarter results, Jefferies said in a research note that they expect that the greater scale of the combined companies after the complete their merger could bode well.

“We remain cautious on underlying fundamentals given secular pressures in Enterprise, however, believe scale, synergies and tax benefits from the deal provide a cushion near term,” Jefferies said in a research note. “For Level 3, we tweak estimates to better reflect F/X and seasonal expenses; we modestly reduce CenturyLink 2Q17 Business revenue and remain below the guide for FY17 revenue, EBITDA and EPS.”

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The two service providers will become an even larger force on the enterprise services front with a larger set of global fiber and service assets with a combined presence in more than 60 countries. CenturyLink will gain an additional 200,000 route miles of fiber, including 64,000 route miles in 350 metropolitan areas and 33,000 subsea route miles connecting multiple continents.

CenturyLink’s legacy, broadband drags

Like its peers AT&T and Verizon, CenturyLink may continue to see strong gains in strategic services like Ethernet and cloud, but declines in Frame Relay and ATM which it is discontinuing, continue be a drag on overall business revenues.

Jefferies said it expects this trend will likely be again reflected in CenturyLink’s second-quarter results.

“We expect continued losses of Legacy revenue to weigh on both 2Q and FY results with the margin loss from Legacy declines overwhelming any gains in Strategic Services,” Jefferies said.

The research firm said it also expects CenturyLink’s broadband subscriber growth won’t show many positive signs either. During the first quarter, the service provider’s broadband subscriber base remained flat at 5.9 million customers.

“Consumer broadband metrics will likely disappoint, with consensus expectations likely not reflecting seasonal pressures,” Jefferies said.

Level 3’s global growth factor

At Level 3 Communications, Jefferies issued a somewhat more favorable forecast that calls for the service provider to see a slight uptick in its first quarter Core Network Services (CNS) revenues in North America.

In the first quarter, Level 3’s total CNS revenues were $1.95 billion, down year over year from $1.6 billion in the same period a year ago. Within the CNS segment, IP/Data services were the dominant revenue source for CNS with $924 million.

“Our forecast implies 1.0% sequential CNS growth in N. America, the same level as reported in 1Q,” Jefferies said. “In our view, the key to accelerating growth would come from the Global Accounts contribution, particularly with low end churn largely under control.”

During the first half of 2016, Level 3’s global accounts added $5 million of revenue per quarter, but slowed to $1 million in the first quarter of 2017 due to what Jefferies attributes to a “broader industry slowdown.”