Strong Free Cash Flow Generation; Synergy Achievement on Track; Business Combination Accounting Impact Negative for Non-Cash Expenses, Net Income and EPS

MONROE, La., Aug. 3, 2011 /PRNewswire/ — CenturyLink, Inc. (NYSE:CTL, news, filings) announces operating results for second quarter 2011, which include the effect of the Qwest acquisition completed April 1, 2011.

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• Generated free cash flow (see Note 1 below) of $950 million in second quarter 2011, excluding special items of $181 million.
• Preliminary assignment of fair value and depreciable life to Qwest property and intangible assets resulted in approximately $200 million higher depreciation and amortization expense than originally anticipated, negatively impacting second quarter 2011 diluted earnings per share by $0.20 per share compared to previous company guidance. Excluding this non-cash variance to previous guidance and other special items, diluted earnings per share would have been $0.64, within previous second quarter guidance of $0.63 to $0.67.
• Reduced access line losses by 18.6% compared to pro forma second quarter 2010, after adjusting for line count methodology changes (see Note 4 below).
• Completed final billing and customer care conversion for Embarq properties in July 2011.  Expect to achieve approximately $375 million in annual run rate operating synergies by year-end 2011 related to the Embarq acquisition.

The following discussion summarizes information contained in the attached supplemental schedules, which should be consulted for additional information.

CONSOLIDATED FINANCIAL RESULTS

Operating revenues for second quarter 2011 were $4.4 billion compared to $1.8 billion in second quarter 2010. This increase was primarily due to $2.7 billion of revenue contribution from the Qwest acquisition completed April 1, 2011. Additionally, increases in strategic revenues, primarily driven by growth in high-speed Internet customers, data services demand from business customers and data transport demand from wireless providers were more than offset by declines in legacy services and other revenues primarily due to the impact of access line losses and lower access revenues, including the impact of anticipated lower universal service fund receipts.

Second quarter 2011 operating revenues compared to second quarter 2010 pro forma operating revenues declined 4.9% from $4.6 billion a year ago to $4.4 billion this quarter.

Operating expenses, excluding special items, increased to $3.7 billion from $1.2 billion in second quarter 2010, primarily due to $2.6 billion of operating costs associated with Qwest.  Depreciation and amortization expense was approximately $200 million higher in second quarter 2011 compared to amounts previously forecast at the end of first quarter 2011 due to higher fair value assignments to certain amortizable intangible assets than originally estimated under business combination accounting. Such fair value assignment is still preliminary as of the end of the second quarter of 2011, and is expected to be completed no later than early 2012.

Operating expenses, excluding special items, of $3.7 billion in second quarter 2011 declined 3.3% from pro forma second quarter 2010 operating expenses of $3.8 billion.

Operating cash flow, excluding special items, increased 107.7% to $1.9 billion from $923 million in second quarter 2010, due to the Qwest acquisition. For second quarter 2011, CenturyLink achieved an operating cash flow margin of 43.5% versus 52.1% in second quarter 2010, reflecting the impact that lower margin Qwest had on CenturyLink’s consolidated operating cash flow margin.

Second quarter 2011 operating cash flow, excluding special items, of $1.9 billion declined 5.0% from second quarter 2010 pro forma operating cash flow of $2.0 billion.

“We are pleased with the early success of our go-to-market plans in the legacy Qwest markets and the continued demand for broadband in legacy CenturyLink markets, as we achieved higher year-over-year high-speed Internet sales during the second quarter compared to pro forma second quarter 2010,” Post said. “However, net broadband customer additions during the quarter were negatively affected by higher than anticipated churn of stand-alone high-speed Internet customers in the legacy Qwest markets. We have taken affirmative steps to mitigate this churn, which we believe will improve net broadband additions in the months ahead.”

Net income, excluding special items, was $262 million in second quarter 2011 compared to $266 million in second quarter 2010. Diluted earnings per share, excluding special items, was $0.44 for second quarter 2011, a 50.0% decrease from the $0.88 reported in second quarter 2010. This decrease was partly due to the non-cash impact that the application of business combination accounting rules associated with the Qwest acquisition had on the combined company’s financial results for the second quarter.

Second quarter 2011 net income, excluding special items, of $262 million declined 13.2% from second quarter 2010 pro forma net income of $302 million.

Under generally accepted accounting principles (GAAP), net income for second quarter 2011 was $102 million compared to $238 million for second quarter 2010, and diluted earnings per share for second quarter 2011 was $0.17 compared to $0.79 for second quarter 2010.

Second quarter 2011 net income and diluted earnings per share reflect after-tax integration, severance, and retention costs associated with the Qwest acquisition of $158 million ($0.26 per share), after-tax integration and severance related costs associated with the Embarq acquisition of $15 million ($0.03 per share), after-tax transaction and integration related costs associated with the Savvis acquisition of $11 million ($0.02 per share), net of a favorable settlement of an operating tax issue of $11 million ($0.02 per share) and the benefit from a reduction of an NOL valuation allowance of $14 million ($0.02 per share).

Second quarter 2010 net income and diluted earnings per share reflect after-tax costs of $11 million ($0.04 per share) related to integration costs associated with the Embarq acquisition, $8 million ($0.03 per share) associated with Embarq severance related costs, and $8 million ($0.02 per share) related to transaction and other costs associated with the then pending Qwest acquisition.

SEGMENT FINANCIAL RESULTS

As previously disclosed, we began reporting the following three segments effective during the second quarter of 2011. The changes in revenue, expense and margin for the three month and six month periods ending June 30, 2011 compared to the three month and six month periods ending June 30, 2010 are primarily due to the acquisition of Qwest.

The following summary compares second quarter 2011 segment performance to pro forma second quarter 2010 as if the Qwest merger had occurred effective January 1, 2010. For additional information we have provided a supplemental schedule attached hereto.

Regional Markets Group

The Regional Markets Group (RMG) generally provides products and services to consumers, small- to medium-sized businesses and regional enterprise customers. RMG revenues of $2.26 billion in second quarter 2011 declined 4.9% from pro forma second quarter 2010. Strategic revenues, which currently represent 32.5% of total segment revenues, increased 5.8% year-over-year due to growth in broadband services, while RMG legacy services revenues decreased 9.1% primarily due to the impact of access line losses on voice and long distance revenues. Segment operating expenses declined 3.9% from pro forma year-ago period driven primarily by lower marketing expense and employee-related costs. RMG income for the quarter declined 5.7% compared to the year-ago period. RMG segment income margin of 56.9% for the second quarter of 2011 declined 40 basis points compared to the year-ago quarter and was flat compared to the first quarter of 2011.

RMG broadband subscribers totaled 5.43 million at the end of second quarter 2011, reflecting the addition of 12,200 high-speed Internet customers during the quarter. RMG experienced solid broadband sales in legacy CenturyLink markets, but a significant portion of that sales momentum was offset by higher than anticipated churn driven by stand-alone high-speed Internet customers in the legacy Qwest markets.

Business Markets Group

The Business Markets Group (BMG) generally provides products and services to enterprise and government customers. BMG second quarter 2011 operating revenues compared to second quarter 2010 pro forma operating revenues declined 4.1% from $961 million a year ago to $922 million this quarter, of which $27 million was due to lower data integration revenues. Segment operating expenses declined 5.2% from the pro forma year-ago period driven primarily by lower data integration expenses and improved operating efficiencies in back office operations. BMG’s segment income declined 2.4% pro forma year-over-year. Segment income margin was 40.2%, a 70 basis point increase from 39.5% in the pro forma second quarter 2010.

Wholesale Markets Group

The Wholesale Markets Group (WMG) provides products and services to other communications providers. WMG second quarter 2011 operating revenues compared to second quarter 2010 pro forma operating revenues declined 4.6% from $1.02 billion a year ago to $975 million this quarter, due primarily to decreases in legacy  services revenues, including access and long distance revenues, which were partially offset by increases in strategic services revenues, including data transport services provided to wireless carriers. WMG segment income decreased 5.8% compared to pro forma second quarter 2010.  WMG segment income margin of 68.8% declined 90 basis points from the pro forma margin year-over-year.

Outlook for 2011. Including CenturyLink’s reported first half 2011 results, the combined CenturyLink and Savvis operations prospectively from July 15, 2011, and excluding the effects of all special items referenced below, CenturyLink expects the current guidance outlined below for full year 2011:

On a pro forma basis for 2011 giving effect as if the Qwest and Savvis mergers had occurred effective January 1, 2011, and excluding the effects of all special items referenced below, CenturyLink expects the following for full year 2011:

For third quarter 2011, including the estimated impacts from the application of business combination accounting rules outlined below, CenturyLink expects total revenues of $4.55 to $4.60 billion, diluted earnings per share of $0.29 to $0.34 and operating cash flow of $1.88 to $1.92 billion, excluding the effects of all special items.

Our second quarter results of operations were adversely affected from the assignment of fair value to the assets acquired and liabilities assumed in connection with our Qwest acquisition, principally due to higher amortization associated with the assignment of approximately $7.6 billion to the customer relationship intangible asset.  Related depreciation and amortization incurred in the second quarter of 2011 was significantly higher than originally estimated at the end of the first quarter due to the preliminary status of the assignment of fair values to the Qwest assets and liabilities at that time.  Based on current circumstances, we expect our depreciation and amortization expense in third and fourth quarters of 2011 to approximate the second quarter 2011 expense level along with the addition of depreciation and amortization related to the Savvis acquisition.

All of the assets and liabilities of Qwest and Savvis will be assigned a fair value pursuant to business combination accounting rules. The related income statement impact of these items may be significant to our results of operations for the remainder of 2011 and may be significantly different than what we have currently included in our outlook information for third quarter and full year 2011. Such fair value assignment for Qwest is still preliminary as of the end of second quarter 2011. Additionally, such fair value assignment for Savvis included in our outlook information for third quarter and full year 2011 is preliminary, and is based solely on internal estimates at this point.

All 2011 outlook figures included in this release exclude the effects of special items, future changes in regulation, integration expenses associated with the Embarq acquisition, transaction and integration expenses associated with the Qwest and Savvis acquisitions, any changes in operating or capital plans and any future mergers, acquisitions, divestitures, buybacks or other similar business transactions.

Savvis Results.  The acquisition of Savvis, Inc. was completed July 15, 2011. To assist the investment community in tracking Savvis’ financial and operating trends, the Company is providing below, separate from CenturyLink’s reported results, selected second quarter 2011 Savvis consolidated financial information.

For second quarter 2011, Savvis’ operating revenues were $264 million, an 18.9% increase from $222 million in second quarter 2010 driven primarily by strong managed services growth across Savvis’ key vertical markets of consumer brands, financial and media. Operating cash flow, excluding special items, was $63 million, a 31.2% increase from $48 million in second quarter 2010. Savvis’ operating cash flow margin, excluding special items, for second quarter 2011 was 23.9%, compared to 21.6% in second quarter 2010. As compared to first quarter 2011 operating cash flow, second quarter 2011 operating cash flow was affected by additional rent expense for new data centers, planned maintenance, seasonal utility cost, and increased consulting staffing.

Net loss, excluding special items, for Savvis was ($12) million in second quarter 2011, compared to a second quarter 2010 net loss of ($9) million.

Savvis invested approximately $42 million in capital investments during second quarter 2011 and generated free cash flow (defined as outlined in attached Savvis, Inc. supplemental schedule) of ($2) million for the quarter compared to ($18) million for second quarter 2010.

These results are included in a supplemental schedule attached hereto and are also available on the CenturyLink’s investor relations Web site at ir.centurylink.com.

Under generally accepted accounting principles (GAAP), Savvis’ net loss for second quarter 2011 was ($15) million compared to a net loss of ($13) million for second quarter 2010.

Second quarter 2011 net loss reflects after-tax costs of $3 million related to acquisition and other related costs.

Second quarter 2010 net loss reflects after-tax costs of $4 million related to acquisition and integration costs.

Integration Update.  During second quarter 2011, CenturyLink incurred pre-tax transaction, severance and integration costs of $245 million related to the Qwest acquisition, $25 million related to the Embarq acquisition and $18 million related to the Savvis transaction.

Additionally, the fifth and final billing and customer care systems conversion for legacy Embarq customers was recently completed in late July.

CenturyLink ended the second quarter 2011 having achieved an annualized operating synergy run rate of approximately $350 million with respect to the Embarq acquisition, and continues to expect to achieve the full anticipated $375 million in annual run rate operating synergies by year-end 2011. The Company also exited second quarter 2011 having achieved an annualized operating synergy run rate of approximately $70 million with respect to the Qwest acquisition, and currently expects to achieve approximately $200 million in annual run rate synergies by year-end 2011.

Reconciliation to GAAP. This release includes certain non-GAAP financial measures, including but not limited to operating cash flow, free cash flow, adjustments to GAAP measures to exclude the effect of special items and certain pro forma combined operating results. In addition to providing key metrics for management to evaluate the Company’s performance, we believe these measurements assist investors in their understanding of period-to-period operating performance and in identifying historical and prospective trends. Reconciliations of non-GAAP financial measures to the most comparable GAAP measures are included in the attached financial schedules. Reconciliation of additional non-GAAP financial measures that may be discussed during the earnings call described below will be available in the Investor Relations portion of the Company’s Web site at www.centurylink.com. Investors are urged to consider these non-GAAP measures in addition to, and not in substitution for, measures prepared in accordance with GAAP.

Investor Call. As previously announced, CenturyLink’s management will host a conference call at 10:30 a.m. Central Time today. Interested parties can access the call by dialing 866.837.9779. The call will be accessible for replay through August 9, 2011, by calling 888.266.2081 and entering the conference ID number 1538277. Investors can also listen to CenturyLink’s earnings conference call and replay by accessing the Investor Relations portion of the Company’s Web site at www.centurylink.com through August 23, 2011.

Forward Looking Statements

Certain non-historical statements made in this release and future oral or written statements or press releases by us or our management are intended to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are based on current expectations only, and are subject to a number of risks, uncertainties and assumptions, many of which are beyond our control.  Actual events and results may differ materially from those anticipated, estimated or projected if one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect.  Factors that could affect actual results include but are not limited to:  the timing, success and overall effects of competition from a wide variety of competitive providers; the risks inherent in rapid technological change; the effects of ongoing changes in the regulation of the communications industry (including those arising out of proposed rules of the Federal Communications Commission (the “FCC”) regarding intercarrier compensation and the Universal Service Fund and the FCC’s related Notice of Proposed Rulemaking released on February 8, 2011); our ability to effectively adjust to changes in the communications industry and changes in the composition of our markets and product mix caused by our recent acquisitions of Savvis, Qwest and Embarq; our ability to successfully integrate the operations of Savvis, Qwest and Embarq into our operations, including the possibility that the anticipated benefits from these acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or costly than anticipated; our ability to use the net operating loss carryovers of Qwest in projected amounts; the effects of changes in our allocation of the Qwest or Savvis purchase price after the date hereof; our ability to effectively manage our expansion opportunities, including retaining and hiring key personnel; possible changes in the demand for, or pricing of, our products and services; our ability to successfully introduce new product or service offerings on a timely and cost-effective basis; our continued access to credit markets on favorable terms; our ability to collect our receivables from financially troubled communications companies; any adverse developments in legal proceedings involving us; our ability to pay a $2.90 per common share dividend annually, which may be affected by changes in our cash requirements, capital spending plans, cash flows or financial position; unanticipated increases or other changes in our future cash requirements, whether caused by unanticipated increases in capital expenditures, increases in pension funding requirements or otherwise; our ability to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages; the effects of adverse weather; other risks referenced from time to time in this report or other of our filings with the Securities and Exchange Commission (the “SEC”); and the effects of more general factors such as changes in interest rates, in tax rates, in accounting policies or practices, in operating, medical, pension or administrative costs, in general market, labor or economic conditions, or in legislation, regulation or public policy. These and other uncertainties related to our business, our July 2011 acquisition of Savvis, our April 2011 acquisition of Qwest and our July 2009 acquisition of Embarq are described in greater detail in Item 1A to our Form 10-K for the year ended December 31, 2010, as updated and supplemented by our subsequent SEC reports. You should be aware that new factors may emerge from time to time and it is not possible for us to identify all such factors nor can we predict the impact of each such factor on the business or the extent to which any one or more factors may cause actual results to differ from those reflected in any forward-looking statements.  You are further cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this presentation.  We undertake no obligation to update any of our forward-looking statements for any reason.

CenturyLink is the third largest telecommunications company in the United States. The company provides broadband, voice and wireless services to consumers and businesses across the country and advanced entertainment services under the CenturyLink™ Prism™ TV and DIRECTV brands. In addition, the company provides data, voice and managed services to business, government and wholesale customers in local, national and select international markets through its high-quality advanced fiber optic network and multiple data centers. CenturyLink also is recognized as a leader in the network services market by key technology industry analyst firms, and is a global leader in cloud infrastructure and hosted IT solutions for enterprises through Savvis, a CenturyLink company. CenturyLink’s customers range from Fortune 500 companies in some of the country’s largest cities to families living in rural America. Headquartered in Monroe, La., CenturyLink is an S&P 500 company and is included among the Fortune 500 list of America’s largest corporations. For more information, visit www.centurylink.com.

SOURCE CenturyLink, Inc.

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