CenturyLink revenue drops to $4.53B as legacy losses offset next-gen consumer, business gains

CenturyLink (NYSE: CTL) reported that Q2 2013 revenues declined year-over-year to $4.53 billion as lower legacy services revenues were only partially offset by increases in strategic business and consumer revenue services such as colocation and managed hosting, broadband and IPTV.

"The decline in second quarter 2013 operating revenues compared to second quarter a year ago, was primarily a result of growth in strategic revenues that was more than offset by lower legacy revenues due to access line losses and lower minutes of use," said Stewart Ewing, CFO & EVP, during the earnings call.

Ewing added that the growth in its "strategic revenues was primarily driven by strength in high-speed internet, high-bandwidth business data services and our data hosting services."

Here's a breakdown of the telco's key metrics:

Consumer Segment: Driven by a year-over-year increase in both broadband Internet and Prism IPTV subscribers, consumer strategic revenues rose 6.4 percent year-over-year to $628 million. However compelling the IPTV gains were in the quarter, consumer revenues still decreased three percent to $1.49 billion due to the ongoing decline in legacy services. 

During the quarter, the telco added 12,000 new Prism customers, ending the quarter with a total of 132,000 subscribers in service. In particular, it began to see growth of the IPTV product in Phoenix, one of the first legacy Qwest markets where it selling the service. It also launched the IPTV service in Colorado Springs, Colo., and began soft launch to Omaha, Neb. At the end of the quarter, the Prism IPTV product reached almost 9 percent penetration of the 1.5 million addressable homes it has in its serving territories.

"We now have a penetration rate of nearly 9 percent across the markets in which the service is available, which includes the newest markets of Phoenix, Colorado Springs, and Omaha. Prism TV triple play bundled customers are significantly less likely to churn then single play voice customers," said Glen Post, president and CEO of CenturyLink. "In the second quarter the churn rate for Prism TV triple play customers was over 500 basis points lower than the single play voice customers."

As it forecast in Q1, the service provider lost 8,400 broadband subscribers, which it said were "due to typical seasonality and lower than expected indirect sales."

Business Segment: The ongoing adoption of high-bandwidth MPLS and Ethernet services drove up strategic business revenues 4.6 percent to $617 million. Similar to the consumer segment, overall business segment revenues declined 0.8 percent to $1.53 billion as lower legacy services offset growth in high-bandwidth offerings.

Two of the key elements to future business growth will be its fiber assets and the continued expansion of Ethernet.

During the first half of the year Post said they put over 1,000 of its fiber-fed multi-tenant buildings into its "advanced MTU program which offers customers broadband capability of up to 500 Mbps of symmetrical service and enhances cloud connectivity for these customers," adding that they plan to leverage their existing fiber "to opportunistically expand GPON capabilities into nearby high density business districts offering broadband speeds of up to 1 Gig."

CenturyLink is going to use the MTU and GPON programs to offer higher upstream speeds to customers that are transitioning to cloud services. Outside of the areas where it has not implemented these programs, it will continue to deploy Ethernet over both fiber and providing Ethernet over Copper.

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

Wholesale Segment: In the wholesale segment, the story continues to center around its ongoing Fiber to the Tower program, which reached 16,700 towers at the end of the quarter.

Strategic and segment revenues fell to $572 million and $910 million, respectively, as declines in copper-based revenue were partially offset by increases in wireless carrier bandwidth demand and Ethernet sales. During the quarter, it completed more than 1,150 fiber builds and expects to complete a total of 4,000 to 5,000 fiber builds in full-year 2013.

"We are experiencing 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 expansion of Ethernet consumption reversing the current revenue compression during 2014."

Data Hosting Segment: The Data Hosting segment revenues rose 7.4 percent year-over-year with gains in both colocation and managed hosting. Colocation revenues rose 2.1 percent to $145 million, while managed hosting revenues rose 21 percent to $134 million.    

During the quarter, the service provider enhanced its cloud service capabilities by completing the purchase of AppFog, a provider of Platform-as-a-Service (PaaS) capability specifically tailored to software developers.

"Our recent acquisition of AppFog, a rapidly growing platform-as-a-service provider used by more than 100,000 developers who have deployed over 150,000 applications, represents an excellent addition to our Savvis cloud service suite," Post said. "We are offering multiple programming languages and interoperability between public and private cloud environments."

The service provider also enhanced its data center footprint by opening a new data center in London, adding about 25,000 square feet of floor space to its portfolio.

Post said that they "expect to add a total of approximately 87,000 saleable square feet of which over 57,000 has been added in the first half of the year."

CenturyLink has forecast Q3 2013 revenues of between $4.5 billion to $4.55 billion and core revenues of $4.09 billion to $4.14 billion.

Shares of CenturyLink were listed at $34.69, down 2 cents, or 4.67 percent in Thursday morning trading on the stock exchange.

For more:
- see the earnings release
- here's the earnings transcript (sub req.)

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