CenturyLink shares plunged 10% Thursday morning after a quarterly earnings release showed that revenues declined year over year (y/y), despite the fact that the company hit its profit target. Shares fell $1.05 (-9.19%) to $10.38 in morning trading.
The company was also forced to take a $6 billion goodwill charge related to the decline of its equity due to its falling stock price, as shares have been punished by the trend of declining revenue, a dividend cut, and delayed regulatory filings which always worry investors. It's now clear from the share-price decline that the urgency for the company to pursue other avenues, such as asset sales, is increasing. CenturyLink executives announced that they have engaged with advisers on strategic alternatives of its consumer business, which it could sell.
CenturyLink shares have now fallen more than 30% this year, as the company battles a number of issues, including network transformation costs related to the cost of integrating its 2017 merger with network provider Level 3, and the continued unfavorable wireline business, which is losing out to competition in both the cable and mobile markets.
The company reported quarterly earnings of $0.34 per share, beating analyst consensus estimates of $0.27 per share. Quarterly revenue decreased by 5% y/y to $5.6 billion. The operating loss swelled to $5 billion due to special charges including the goodwill charge. On an operating basis, CenturyLink generated cash, though its free cash flow has declined significantly over the last year. Free cash flow (excluding cash integration and transformation costs) was $315 million compared with $941 million in the prior-year period.
The big problem for CenturyLink is that all of the trends it is battling are long-term industry trends. For past years, Wall Street analysts have been forced to revise the earnings outlook down due to declines in landlines and voice revenue. Revenue in all of the company's major business units are declining. For example, International has fallen from $935 million to $891 million y/y. The enterprise business unit fell from $1.54 billion to $1.52 billion; small and medium business declined from $784 million to $755 million; wholesale fell from $1.1 billion to $1.03 billion; and consumer fell from $1.57 billion to $1.44 billion.
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The company reiterated its full-year outlook of expected adjusted EBITDA of $9.0 billion to $9.2 billion and free cash flow of $3.1 billion to $3.4 billion, but the market does not appear to be buying it. Investors want to see CenturyLink stem the revenue losses and decrease costs faster—or possibly start off-selling assets.
The biggest fear is that as the share price grows and revenue shrinks, the leveraged company is losing a cushion in liquidity. The company reported $441 million of net cash on the balance sheet, down from $488 million as of the end of the fourth quarter of 2018. Its long-term debt stands at $34.8 billion, down slightly from $35.4 billion at the end of last December. Because it is generating net cash flow, the company is in no imminent liquidity crisis, but if financing costs increase, or revenues continue to decline it could easily find itself in a bigger crunch.
The company recently took steps to reduce its leverage, including cutting its dividend in half in February, which sent the share price tumbling, since a large portion of CenturyLink's investor base is there for the dividend.
The company has also been under assault by activist investors. Southeastern Asset Management, which holds 6.2% stake in CenturyLink, has reported in a U.S. Securities and Exchange Commission filing that it believes the company’s fiber assets are undervalued and that the company should sell assets.
Looking forward, it appears that a major restructuring is ahead for CenturyLink. If the share price drops below $10, there will be more urgency for the company to reorganize and sell assets.
R. Scott Raynovich is the founder and chief analyst of Futuriom. For two decades, he has been covering a wide range of technology as an editor, analyst, and publisher. Most recently, he was VP of research at SDxCentral.com, which acquired his previous technology website, Rayno Report, in 2015. Prior to that, he was the editor in chief of Light Reading, where he worked for nine years. Raynovich has also served as investment editor at Red Herring, where he started the New York bureau and helped build the original Redherring.com website. He has won several industry awards, including an Editor & Publisher award for Best Business Blog, and his analysis has been featured by prominent media outlets including NPR, CNBC, The Wall Street Journal, and the San Jose Mercury News. He can be reached at [email protected]; follow him @rayno.
Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceTelecom staff. They do not represent the opinions of FierceTelecom.