CenturyLink Reports Second Quarter 2015 Results

MONROE, La., Aug. 5, 2015 /PRNewswire/ — CenturyLink, Inc. (NYSE:CTL, news, filings) today reported results for second quarter 2015.

“CenturyLink’s results for the second quarter were below our forecast and Street consensus, primarily due to continued pressure on wholesale revenues and higher employee and benefit costs,” said Glen F. Post III, chief executive officer and president. “While we are disappointed with the financial results for this quarter, we are positioning CenturyLink to drive stronger sales, strategic revenue growth and improved operating cash flow in the months ahead.

“The sales force realignment that we completed earlier this year is gaining traction and beginning to positively impact our results. For example, the improvement in sales to business customers that began in March continued throughout the quarter, resulting in 15% sequential growth in Business sales compared to first quarter sales. In addition, we exited the second quarter with a strong funnel of sales opportunities, which has continued to grow.

“While our path to revenue and cash flow growth is taking longer than we initially anticipated, we remain confident that we have the right assets and strategies to drive long-term revenue growth. We also have taken action to lower our planned capital investment and operating costs for the second half of 2015 to align with our current level of revenue generation,” Post concluded.

Second Quarter 2015 Highlights

• Achieved core revenues of $4.02 billion in second quarter 2015; revenue from high-bandwidth data services provided to business customers, including MPLS³, Ethernet and Wavelength, grew more than 10% year-over-year.
• Generated free cash flow of $562 million, excluding special items.
• Added approximately 8,400 CenturyLink^® Prism^TM TV customers during second quarter 2015, ending the period with approximately 258,000 customers.
• Ended the quarter with more than 6.1 million high-speed Internet customers, a decrease of approximately 9,200 customers in second quarter 2015 due to typical seasonality.
• Purchased and retired an additional 2.5 million shares of CenturyLink common stock for nearly $90 million during second quarter 2015.

Consolidated Financial Results

Operating revenues for second quarter 2015 were $4.42 billion compared to $4.54 billion in second quarter 2014. 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 revenues⁴ primarily driven by access line losses, lower long distance revenues and the continued decline in access revenues. The growth of strategic revenues was primarily due to continued business customer demand for high-bandwidth data services, along with year-over-year growth in high-speed Internet and CenturyLink^® Prism^TM TV customers and select price increases.

Operating expenses, excluding special items, increased to $3.84 billion from $3.82 billion in second quarter 2014. The year-over-year increase was primarily driven by higher employee benefit expenses, Prism^TM TV and other costs, which were partially offset by lower customer premise equipment costs (related to lower data integration revenues) and lower depreciation and amortization expenses.

Operating cash flow (as defined in our attached supplemental schedules), excluding special items, decreased to $1.62 billionfrom $1.81 billion in second quarter 2014. For second quarter 2015, CenturyLink achieved an operating cash flow margin, excluding special items, of 36.8% versus 39.9% in second quarter 2014. These decreases were primarily driven by the decline in higher-margin legacy revenues and the higher operating expenses described above. The Company expects operating cash flow margins to improve in the second half of 2015 compared to second quarter 2015.

Adjusted Net Income and Adjusted Diluted Earnings Per Share (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 certain intangible assets related to major acquisitions since mid-2009, and the non-cash after-tax impact to interest expense relating to the assignment of fair value to the outstanding debt assumed in connection with those acquisitions.

Excluding the items outlined above, CenturyLink’s Adjusted Net Income for second quarter 2015 was $308 million compared to Adjusted Net Income of $408 million in second quarter 2014. Second quarter 2015 Adjusted Diluted EPS was $0.55 compared to$0.72 in the year-ago period due to lower operating cash flow partially offset by lower depreciation and amortization and the impact of the lower number of shares outstanding due to share repurchases since second quarter 2014. See the attached schedules for additional information.

GAAP Results – Second Quarter

Under generally accepted accounting principles (GAAP), net income for second quarter 2015 was $143 million compared to a net income of $193 million for second quarter 2014, and diluted earnings per share was $0.26 for second quarter 2015 compared to$0.34 for second quarter 2014.

Additional details regarding the Company’s special items for the three months ended June 30, 2015 and 2014 are provided in the accompanying financial schedules.

Segment Financial Results⁵

Business

The Business segment continued to experience solid demand for high-bandwidth data services in the second quarter of 2015.

• High-bandwidth data services revenues from retail business customers grew 12.5% year-over-year.
• Strategic revenues were $1.57 billion in the quarter, a 0.4% decrease from second quarter 2014, primarily due to continued declines in low-bandwidth data services.
• Total revenues were $2.66 billion, a decrease of 4.6% 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.
• Business segment margin declined to 42.6% from 45.6% a year ago primarily due to the continued decline in legacy and low-bandwidth data services revenue, along with higher sales employee-related expenses.

Consumer

The Consumer segment achieved strong year-over-year strategic revenue growth driven primarily by increased high-speed Internet and CenturyLink^® Prism^TM TV customers, along with select price increases.

• Strategic revenues were $758 million in the quarter, a 6.9% increase over second quarter 2014.
• Total revenues were $1.50 billion for second quarter 2015, flat compared to second quarter 2014.
• Added approximately 8,400 CenturyLink^® Prism^TM TV customers during second quarter 2015 and launched service in three new markets, ending the quarter with 2.6 million addressable homes.

Connect America Fund Phase 2 (CAF Phase 2)

On April 29, 2015, the Federal Communications Commission (FCC) formally offered potential support payments to price cap carriers, under CAF Phase 2 of the Connect America and Intercarrier Compensation Reform order, to build and operate a network capable of providing high-speed broadband services to underserved areas. CenturyLink is eligible for up to $514 million per year for the next six years to provide services to approximately 1.2 million locations in certain of its markets subject to the terms of this FCC order.

At this time, CenturyLink 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. The Company expects to complete its financial evaluation and notify the FCC of its ultimate decision on the level of support funding on or before the August 27, 2015 FCC notification deadline. In markets where the Company accepts the CAF Phase 2 funding, net distributions are expected to begin in September orOctober 2015 and will be retroactive to the first of the year.

Guidance — Third Quarter and Full-Year 2015

Excluding any impact of CAF Phase 2, the Company expects third quarter 2015 operating revenues, core revenues and operating cash flow to be higher compared to second quarter 2015 primarily driven by growth in strategic services revenues and select price increases.

The Company anticipates the potential incremental impact of CAF Phase 2 on the guidance provided above to be an additional$20-$150 million of operating revenues and operating cash flow and an additional $0.03-$0.16 of Adjusted Diluted EPS in third quarter 2015, with the actual amounts to be determined by the ultimate level of CAF Phase 2 funding accepted by the Company. See our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 for a further description of our rights and obligations under the CAF Phase 2 program.

For the full-year 2015, the Company has updated its guidance issued on February 11, 2015 to reflect year-to-date results as well as current expectations for the remainder of the year. Excluding any impact of CAF Phase 2, guidance for full-year 2015 total operating and core revenues has been lowered reflecting first half 2015 actual results, along with the anticipated impact of continued pressure on hosting, wholesale private line and data integration revenues. Full-year 2015 operating cash flow and Adjusted Diluted EPS guidance has also been lowered due primarily to the reduction in revenues. The Company is not changing its previous guidance for free cash flow for full-year 2015, as the impact of the reduction in revenues is anticipated to be offset by planned reductions in operating costs and capital expenditures.

The Company anticipates the potential incremental impact of CAF Phase 2 on the guidance provided above to be an additional$50-$200 million of operating revenues and operating cash flow and an additional $0.05-$0.21 of Adjusted Diluted EPS. Since any significant capital expenditures related to the CAF Phase 2 program are not expected to begin until 2016, the Company also expects an additional $30-$115 million of free cash flow in full-year 2015, with the actual amounts to be determined by the ultimate level of CAF Phase 2 funding accepted by the Company. See our Quarterly Report on Form 10-Q for the quarterly period endedMarch 31, 2015 for a further description of our rights and obligations under the CAF Phase 2 program.

All 2015 guidance figures and 2015 outlook statements included in this release (i) speak as of August 5, 2015 only, (ii) exclude the impact of any share repurchases made after June 30, 2015 and (iii) exclude the effects of special items, future impairment charges, future changes in regulation (including changes in the CAF Phase 2 program), future changes in tax laws or accounting rules, unforseen litigation or contingencies, integration expenses associated with major acquisitions, any changes in operating or capital plans or other unforeseen events or circumstances that impact our financial performance, and any future mergers, acquisitions, divestitures, joint ventures or other similar business transactions. See “Forward Looking Statements” below. For additional information on how we define certain of the terms used above, see the attached schedules.

Investor Call

As previously announced, CenturyLink’s management will host a conference call at 4:00 p.m. Central Time today, August 5, 2015. Interested parties can access the call by dialing 866-814-8485. The call will be accessible for replay through August 13, 2015, by dialing 888-266-2081 and entering the access code 1659105. Investors can also listen to CenturyLink’s earnings conference call and webcast replay by accessing the Investor Relations portion of the Company’s website at www.centurylink.com through August 27, 2015. Financial, statistical and other information related to the call will also be posted to our website.

Reconciliation to GAAP

This release includes certain non-GAAP financial measures, including but not limited to operating cash flow, free cash flow, core revenues, Adjusted Net Income, Adjusted Diluted EPS and adjustments to GAAP measures to exclude the effect of special items. 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 above will be available in the Investor Relations portion of the Company’s website 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 (NYSE: CTL) is a global communications, hosting, cloud and IT services company enabling millions of customers to transform their businesses and their lives through innovative technology solutions. CenturyLink offers network and data systems management, Big Data analytics and IT consulting, and operates more than 55 data centers in North America, Europe and Asia. The company provides broadband, voice, video, data and managed services over a robust 250,000-route-mile U.S. fiber network and a 300,000-route-mile international transport network. Visit www.centurylink.com for more information.

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 assumptions, risks and uncertainties, many of which are beyond our control. Actual events and results may differ materially from those anticipated, estimated, projected or implied by us if one or more of these risks or uncertainties materialize, or if our 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, including product displacement; the effects of ongoing changes in the regulation of the communications industry, including the outcome of regulatory or judicial proceedings relating to intercarrier compensation, access charges, universal service, broadband deployment, data protection and net neutrality; our ability to effectively adjust to changes in the communications industry, and changes in our markets, product mix and network; 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, including our ability to effectively respond to increased demand for high-speed broadband service; our ability to successfully introduce new product or service offerings on a timely and cost-effective basis; the adverse impact on our business and network from possible equipment failures, security breaches or similar attacks on our network; our ability to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages; our ability to use our net operating loss carryovers in projected amounts; our continued access to credit markets on favorable terms; our ability to collect our receivables from financially troubled companies; our ability to maintain favorable relations with our key business partners, suppliers, vendors, landlords and financial institutions; any adverse developments in legal or regulatory proceedings involving us; changes in our operating plans, corporate strategies, dividend payment plans or other capital allocation plans, including those caused by changes in our cash requirements, capital expenditure needs, debt obligations, pension funding requirements, cash flows, or financial position, or other similar changes; the effects of adverse weather; other risks referenced from time to time in our filings with the SEC; and the effects of more general factors such as changes in interest rates, in tax laws, 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 and our recent acquisitions are described in greater detail in Item 1A of our Form 10-K for the year endedDecember 31, 2014, 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. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We undertake no obligation to update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Furthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of this release, and is based upon, among other things, the existing regulatory and technological environment, industry and competitive conditions, economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

(1) Core revenues defined as strategic revenues plus legacy revenues (excludes data integration and other revenues), as described further in the attached schedules.

(2) See attachments for non-GAAP reconciliations.

(3) Multi-Protocol Label Switching

(4) Beginning first quarter 2015, certain revenues were reclassified between strategic services and legacy services. All historical periods have been restated to reflect this change.

(5) All references to segment data herein reflect certain adjustments described in the attached schedules.

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SOURCE CenturyLink, Inc.