CenturyLink Reports Second Quarter 2012 Earnings

MONROE, La., Aug. 8, 2012 /PRNewswire/ — CenturyLink, Inc. (NYSE:CTL, news, filings) today reported strong operating revenues, operating cash flow and free cash flow for second quarter 2012.

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“CenturyLink continued to generate solid results in the second quarter, maintaining our top-line revenue trend improvement and strong cash flow generation,” said Glen F. Post, III, chief executive officer and president. “We successfully completed our operating group restructuring during the second quarter without disrupting the positive sales momentum across our business and believe that CenturyLink is even better positioned to serve our enterprise customers across the United States and internationally.

“We experienced continued broadband and Prism™ TV subscriber growth in the second quarter, in spite of typical lower seasonal demand, while continuing to improve customer retention as our annual access line loss rate of decline slowed to 6.1% this quarter from 7.4% in the pro forma year-ago period. We generated 5.8% sequential and 7.9% year-over-year growth in colocation and managed hosting revenues and grew strategic data revenues across our Regional Markets Group (RMG) and Enterprise Markets Group (EMG).

“As we enter the second half of 2012, we remain focused on investing in broadband expansion and enhancement, Prism™ TV, fiber-to-the-tower and managed hosting and cloud computing services in order to maximize the opportunities for future revenue growth,” said Post.

Second Quarter Highlights

CenturyLink continued to improve its top-line revenue trend, deliver solid subscriber results, invest in key strategic initiatives and meet its Qwest and Savvis synergy targets in second quarter 2012. Among the quarter’s highlights:

• Improved year-over-year actual-to-pro forma revenue trend to a 1.2% rate of decline (1.7% rate of decline excluding data integration revenue), compared to a 3.8% decline in pro forma second quarter 2011.
• Achieved free cash flow of $779 million, excluding special items and integration-related capital expenditures.
• Reduced access line loss by 22% as the line loss trend improved during second quarter 2012 to a 6.1% annual decline compared to a 7.4% annual decline in pro forma second quarter 2011.
• Added more than 18,000 high-speed Internet customers reflecting expected second quarter seasonality; ended second quarter 2012 with 5.76 million subscribers[3].
• Expanded the number of Prism™ TV subscribers by 11% in second quarter 2012 from first quarter 2012 and increased penetration of available homes in our markets to more than 9%.
• Generated sequential recurring revenue growth in our Enterprise Markets Group’s Network Services and Data Hosting Services, along with strong bookings in both operating groups.
• As of June 30, 2012, we had more than 50 data centers[4] in North America, Europe and Asia, with total sellable floor space of approximately 1.4 million square feet.

Consolidated Second Quarter Financial Results

Operating revenues for second quarter 2012 were $4.61 billion compared to $4.41 billion in second quarter 2011. This increase was primarily due to $278 million of revenue contributions from the Savvis acquisition completed July 15, 2011, increases in strategic revenues, primarily driven by business customer demand for high-bandwidth data services, growth in high-speed Internet and Prism™ TV subscribers and higher data integration revenues. These increases were more than offset by declines in legacy services revenues primarily due to the impact of access line losses and lower access revenues.

Second quarter 2012 operating revenues compared to pro forma second quarter 2011 operating revenues declined 1.2% from $4.67 billion a year ago to $4.61 billion this quarter, due to the decline in legacy revenues more than offsetting the increase in strategic revenues and data integration revenues as discussed above.

Operating expenses, excluding special items, increased to $3.92 billion from $3.67 billion in second quarter 2011, primarily due to $292 million of operating costs associated with the Savvis acquisition and higher data integration costs. These increases were partially offset by lower personnel-related costs, along with lower than anticipated depreciation and amortization expense as a result of one-time true-up adjustments.

Operating expenses, excluding special items, decreased to $3.92 billion in second quarter 2012 from pro forma second quarter 2011 operating expenses of $3.94 billion.

Operating cash flow (as defined in our supplemental schedules), excluding special items, decreased to $1.90 billion from $1.92 billion in second quarter 2011, primarily due to the decline in legacy revenues, which was partially offset by the Savvis acquisition contribution to operating cash flow. For second quarter 2012, CenturyLink achieved an operating cash flow margin, excluding special items, of 41.2% versus 43.5% in second quarter 2011, reflecting the impact that the lower margins of Savvis and the legacy revenues decline had on CenturyLink’s consolidated operating cash flow margin in the second quarter 2012.

Second quarter 2012 operating cash flow of $1.90 billion, excluding special items, declined 4.0% from pro forma $1.98 billion in the second quarter 2011, primarily due to the decline in legacy revenues. Operating cash flow margin, excluding special items, was 41.2% in second quarter 2012 compared to 42.4% in pro forma second quarter 2011.

Adjusted Net Income and Adjusted Diluted Earnings Per Share (Adjusted Diluted EPS)

Adjusted Net Income and Adjusted Diluted EPS exclude the after-tax impact of special items, the non-cash after-tax impact of the amortization of intangibles, and the non-cash after-tax impact to interest expense of the assignment of fair value to debt outstanding related to the Embarq, Qwest and Savvis transactions.

Excluding the items outlined above, CenturyLink’s Adjusted Net Income for second quarter 2012 was $403 million compared to pro forma Adjusted Net Income of $428 million in second quarter 2011. Second quarter 2012 Adjusted Diluted EPS was $0.65 compared to pro forma Adjusted Diluted EPS of $0.69 in the year-ago period. See the attached schedules for additional information.

GAAP Results – Second Quarter

Under generally accepted accounting principles (GAAP), net income for second quarter 2012 was $74 million compared to $115 million for second quarter 2011, and diluted earnings per share for second quarter 2012 was $0.12 compared to $0.19 for second quarter 2011. Second quarter 2012 net income and diluted earnings per share reflect net after-tax impacts of $123 million ($0.20 per share) related to losses on the early retirement of debt, $7 million ($0.01 per share) related to severance, integration and retention costs associated with the Qwest and Savvis acquisitions and $14 million ($0.02 per share) related to severance associated with recent expense reduction initiatives.

Second quarter 2011 net income and diluted earnings per share reflect after-tax integration, severance, and retention costs associated with the Embarq, Qwest and Savvis acquisitions of $184 million ($0.31 per share), partially offset by 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).

Segment Results / Highlights The following segment results reflect the operating group restructuring we announced in late March and outlined in our first quarter 2012 earnings release. The attached Supplemental Pro Forma Segment Data schedule provides selected financial information for the four segments discussed below, along with restated historical quarterly segment financial information retroactive to first quarter 2011.

Regional Markets Group (RMG) RMG continued to improve revenue and access line trends in local markets by leveraging CenturyLink’s local operating model.

• Strategic revenues for RMG were $894 million in the quarter, a 5.8% increase over pro forma second quarter 2011. Excluding the impact of private line services, the adjusted growth rate was more than 7%.
• Generated $2.48 billion in total revenues, a decrease of 2.6% from pro forma second quarter 2011, reflecting the continued decline in legacy services.
• Approximately 50% of new Prism™ TV subscribers added in the past twelve months have been new customers to CenturyLink.
• Ended the second quarter with over 94,000 Prism™TV subscribers in service.

Wholesale Markets Group (WMG) WMG generated modest strategic revenue growth as increases in fiber-based revenue more than offset the expected decline in copper-based revenue as a result of the continued expansion of carrier bandwidth consumption.

• Strategic revenues for WMG were $572 million in the quarter, a 2.1% increase over pro forma second quarter 2011, driven by wireless carrier bandwidth expansion and Ethernet sales.
• Generated $944 million in total revenues, a decrease of 4.1% from pro forma second quarter 2011, reflecting the continued decline in legacy services primarily driven by lower switched access minutes of use associated with access line loss and displacement of access minutes by alternative forms of communication such as email, social media, texting, wireless and VoIP.
• Completed approximately 1,350 fiber builds during the second quarter and over 2,000 year-to-date, ending the quarter with about 12,150 fiber-connected towers. We currently remain on track to complete 4,000 to 5,000 fiber builds in 2012.

Enterprise Markets Group (EMG) – Network Services EMG – Network Services achieved solid growth in recurring revenue sales in the second quarter.

• Strategic revenues for EMG were $333 million in the quarter, a 2.8% increase over pro forma second quarter 2011 driven by strength in high bandwidth services. Excluding the impact of private line services, the adjusted growth rate was approximately 7%.
• Generated $648 million in total revenues, an increase of 2.0% from pro forma second quarter 2011, reflecting growth in high-bandwidth broadband offerings and data integration revenues partially offset by declines in legacy services revenues.
• Bookings in second quarter 2012 were higher than anticipated driven by strategic services growth in MPLS[5] and Ethernet.

Enterprise Markets Group (EMG) – Data Hosting Services EMG – Data Hosting (primarily Savvis operations) improved revenue growth in managed hosting (including cloud), and colocation with strength in traditional managed hosting solutions and financials and consumer brands verticals.

• Operating revenues were $277 million in the quarter, a 6.5% increase from pro forma second quarter 2011. Colocation revenues were $112 million, a 4.7% increase from pro forma second quarter 2011 and managed hosting revenues of $107 million grew 11.5% over the same period.
• Announced 2012 planned data center expansions in seven markets, of which four were online in the second quarter.

Integration Update

During second quarter 2012, CenturyLink incurred pre-tax transaction, integration, severance and retention costs of $12 million ($7 million net after-tax) related to the Qwest and Savvis acquisitions.

CenturyLink ended second quarter 2012 with an annualized operating expense synergy run rate of approximately $380 million from the Qwest acquisition. We currently remain on track to exit 2012 with approximately $465 million in annual run-rate synergies related to the Qwest acquisition.

Guidance – Third Quarter 2012 and Full Year 2012

CenturyLink expects third quarter 2012 operating revenues to be negatively impacted by the decline in access revenues as a result of the implementation of the Federal Communications Commission’s USF/ICC Transformation Order (Order) and the reduction effective July 1, 2012, in the monthly universal service contribution rate assessed to end users, which will be partially offset by the implementation of Access Recovery Charges in accordance with the Order. Operating expenses are also anticipated to increase in third quarter 2012 compared to second quarter 2012 due to the normal seasonality of outside plant maintenance and utility costs, data center expansion operating costs and the return of depreciation and amortization expense to expected levels, which will be partially offset by other operating efficiencies.

The Company expects fourth quarter 2012 operating cash flow to increase compared to third quarter 2012 due to anticipated continued growth in strategic revenues and lower outside plant maintenance and utility costs.

All 2012 outlook figures included in this release exclude the effects of special items, future changes in regulation, 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. In addition, all outlook figures are based on acquisition-related fair value estimates for Savvis that remain subject to finalization. All assets and liabilities of Savvis have been assigned a fair value pursuant to business combination accounting rules. Such fair value assignments for Savvis have not been finalized and are subject to further adjustment before becoming final.

Investor Call

As previously announced, CenturyLink’s management will host a conference call at 4:00 p.m. Central Time today, August 8, 2012. Interested parties can access the call by dialing 866-802-4328. The call will be accessible for replay through August 15, 2012, by calling 888-266-2081 and entering the access code 1584532. 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 30, 2012.

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.

About CenturyLink

CenturyLink is the third largest telecommunications company in the United States and is recognized as a leader in the network services market by technology industry analyst firms. The company is a global leader in cloud infrastructure and hosted IT solutions for enterprise customers. CenturyLink provides data, voice and managed services in local, national and select international markets through its high-quality advanced fiber optic network and multiple data centers for businesses and consumers. The company also offers advanced entertainment services under the CenturyLink™ Prism™ TV and DIRECTV brands. 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.

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 recent reforms and changes by the Federal Communications Commission regarding intercarrier compensation and the Universal Service Fund, among other things); 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 and Qwest 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 assignment of the Savvis purchase price to identifiable assets or liabilities 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 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, 2011, 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 release. We undertake no obligation to update any of our forward-looking statements for any reason.

[1] See the attached pro forma statements of income for more information about our pro forma results discussed in this release. [2] See attachments for non-GAAP reconciliations. [3] Effective this quarter, CenturyLink modified its high-speed Internet reporting to include consumer, business and wholesale subscribers instead of only consumer and small business subscribers. [4] We define a “data center” as any facility where we market, sell and deliver either colocation services or multi-tenant managed services, or both. [5] Multiprotocol Label Switching [6] Excludes approximately $80 million of integration-related capital expenditures

SOURCE CenturyLink, Inc.