CenturyLink's Post: New credit policy will enhance consumer broadband growth, reduce churn

CenturyLink (NYSE: CTL) is implementing a new consumer credit policy for customers who sign up for their broadband-only service, a move that will enable it to battle churn and pave the way for new growth.

Speaking to investors during the second quarter earnings call, Glen Post, CEO of CenturyLink said that the impact of this credit policy won't be truly felt until next year.

"We're tightening our credit policies for Internet-only customers to reduce sales to customers who tend to change Internet providers frequently leaving unpaid balances when they exit," Post said. "While we expect this change to negatively consumer net broadband additions through the remainder of 2015, we anticipate this adjustment will help improve our broadband growth in 2016 due to lower churn."

Post added that the credit policy will not affect its participation in President Obama's new ConnectHome initiative, a pilot program that is designed to provide broadband to low-income families in 27 cities and one tribal nation.

CenturyLink provides up to 1.5 Mbps for $9.95 a month through its Internet Basics program.

"This move is unrelated to and will have no impact on our marketing initiative for our Internet Basics program," Post said. "We remain totally committed to offering affordable broadband access lower income households across our broadband service areas."

Speaking of broadband, the service provider continues to see an uptick in subscribers, particularly in its GPON-based FTTH service markets. It said is on track to meet its goald to extend GPON services to 700,000 homes by the end of the year.

"In the consumer segment, we continue to see good results in those markets where have deployed higher broadband speeds and Prism TV services," Post said. "Specifically, in our GPON markets the take rates continue to be strong and are exceeding our expectations."

Post added that because GPON is "such a great driver of demand we continue to expand the footprint, ending the quarter with 600,000 households in 16 markets having access to gigabit speeds."

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

Consumer: Driven mainly by an uptick in broadband Internet and Prism TV subscribers, along with select service price increases, strategic consumer revenues were $758 million, up 6.9 percent year-over-year from the second quarter 2014. Total consumer revenues remained flat year-over-year at $1.5 billion.

During the quarter, CenturyLink added about 8,400 Prism TV customers and launched service in three new markets, ending the quarter with 2.6 million addressable homes. It passed added 175,000 homes in the second quarter with Prism TV, ending the period with over 2.6 million Prism TV addressable households.

Post said that the company plans to increase IPTV penetration to approximately 250,000 additional homes to reach more than 2.8 million total Prism TV addressable homes by the end of the year. In addition, it plans to introduce a new OTT video service. 

"We're developing an over the top offering that will provide a robust video offering for customers within and outside our Prism TV footprint," Post said.

Business/Wholesale: CenturyLink reported that it continued to see "solid demand" for high-bandwidth data services in the second quarter, which grew 12.5 percent year-over-year. Similar to its ILEC peers AT&T (NYSE: T) and Verizon (NYSE: VZ), CenturyLink reported that strategic revenues were $1.57 billion in the quarter, a down 0.4 percent from the second quarter 2014, primarily due to continued declines in low-bandwidth data services.

One of the emerging services that's been gaining traction with existing and new business customers is GPON. The GPON service has been a sound foundation for it to deliver its cloud-based Microsoft 360 and other managed services.

"We have made fiber-based GPON available to approximately 475,000 business locations and we expect to add GPON service to another 25,000 businesses by year-end," Post said. "There's good demand for this product and given our relatively low penetration we feel like we have strong upside with those investments."

Total business revenues were $2.66 billion, a decrease of 4.6 percent from second quarter 2014, due to lower legacy, low-bandwidth data services and data integration revenues, which were partially offset by growth in high-bandwidth revenues. At the same time, business segment margin declined to 42.6 percent from 45.6 percent a year ago primarily due to the continued decline in legacy and low-bandwidth data services revenue, along with higher sales employee-related expenses.

CenturyLink says it will also participate in the FCC's Connect America Fund Phase II. The telco is eligible to receive up to $514 million per year for the next six years to provide broadband services to nearly 1.2 million locations in certain parts of its markets.

It said that it estimates that it will accept at least $300 million of the available support and continues to evaluate the remaining opportunity for support funding of approximately $200 million. CenturyLink expects to complete its financial evaluation and notify the FCC of its ultimate decision on the level of support funding on or before the Aug. 27, 2015, FCC notification deadline. 

Total second quarter 2015 operating revenues were $4.42 billion, down from $4.54 billion in second quarter 2014. CenturyLink said the strength in consumer strategic revenues partially offset the declines in low bandwidth data services and data integration revenues, as well as the decline in legacy revenues due to ongoing access line losses, lower long distance revenues and the continued decline in access revenues.

Excluding special items and CAF II, CenturyLink forecast third quarter operating revenues to be in the range of $4.42 to $4.47 billion and core revenues of $4.02 to $4.07 billion.

Shares of CenturyLink were listed at $27.50, down $1.06, or 3.71 percent, in Thursday morning trading on the New York Stock Exchange.

For more:
- see the earnings release
- hear the earnings call (reg req.)

Special report: Wireline telecom earnings in the second quarter of 2015

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This article was updated on Aug. 18 to reflect the fact it plans to expand IPTV service to an additional 250,000 households