Q1 Earnings Preview: All odds are against CenturyLink

The troubled telecommunication services provider CenturyLink (NYSE: CTL) is slated to report Q1 2019 earnings results on Wednesday after the market close. CenturyLink stock slumped to a multi-year low ($11.28) last week and was trading down about 1% during midday today. From the time CenturyLink completed the Level 3 acquisition in November 2017, the company’s stock has been struggling a lot.

Wall Street expects the Monroe, Louisiana-based firm to post earnings of $0.27 per share on revenue of $5.71 billion for the March quarter. This represents an year-over-year increase of 8% in earnings and a decline of 4% in revenue.

Even though CenturyLink beat earnings estimates for the fourth quarter, the stock plummeted 13% as the company reduced its annual dividend payout from $2.16 to $1.00. The company stated that it is shifting the capital allocation priorities and reducing annual dividend.

CenturyLink reported a net loss of $2.41 billion or $2.26 per share for the three-month ended March 2019 compared to profit of $1.13 billion or $1.06 per share in the year-ago quarter. Revenue dropped 3.8% year-over-year to $5.78 billion and met analysts’ views.

Under the revised capital allocation policy, CenturyLink planned to reduce the net leverage target to a range of 2.75 times to 3.25 times in a specified timeframe of approximately three years and continue to fund its growth and transformation initiatives. The company projected to return more than $1 billion annually to shareholders through the $1.00 annual dividend.

CenturyLink stock slumped to a multi-year low ($11.28) last week

For fiscal 2019, CenturyLink had forecasted adjusted EBITDA to be in the range of $9.0 billion to $9.2 billion and free cash flow to be between $3.10 billion and $3.40 billion. CenturyLink also estimated capital expenditure to be in the range of $3.50 billion to $3.80 billion for fiscal 2019.

On March 1, 2019, the Board of Directors declared a regular quarterly dividend of $0.25 per share, which was paid on March 22, 2019, to shareholders of record as of March 12, 2019.

In February, Southeastern Asset Management, which holds 6.2% stake in CenturyLink, said in an SEC filing that the company’s fiber assets are undervalued in the stock market and wanted to add more directors in the Board who have got fiber and network expertise as well as financial expertise. Southeastern added that CenturyLink should improve its balance sheet through asset sales, not through dividend cut.

CenturyLink replied back to Southeastern saying that, “While we disagree with Southeastern’s criticism of our recently announced capital allocation policy, we are engaged in discussions with Southeastern regarding their suggested director nominees.” CenturyLink added that, “As the sale of our data center business a few years ago demonstrated, the company is willing to modify its portfolio when it believes doing so would increase the long-term value of our business.”

On March 4, 2019, CenturyLink’s shares fell again sharply after the company stated that it will not be able to file its Form 10-K with the presribed time period provided by the SEC. However, a week later CenturyLink filed the Form 10-K.

CenturyLink’s consolidated revenue (excluding acquisitions) has been lingering for a prolonged period as the company had experienced a continuous systemic decline in its local voice, long-distance voice, network access and private line revenue.

More recently, CenturyLink had experienced declines in revenue derived from the sale of certain of business products and services. It is also feared that deteriorating revenue and cash flows from operating activities may not be adequate to fund all of the cash requirements of the company.

Last month, CenturyLink’s peer Verizon Communications (VZ) reported its first quarter 2019 results. The telecom giant’s adjusted EPS of $1.20 beat analysts’ views of $1.17, while revenue of $32.13 billion missed consensus targets of $32.15 billion. Verizon lifted its earnings outlook for FY19.

CenturyLink stock had lost 24% of its value since the beginning of 2019 and dropped 37% in the past 52 weeks.

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