LUMN

CenturyLink, Inc. 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for CenturyLink, Inc. (formerly CenturyTel, Inc.) for the period ended September 30, 2010. The company is a large accelerated filer operating as an integrated communications provider in 33 states, offering voice, data, broadband, and video services. The reporting period reflects the full integration of the Embarq Corporation acquisition (closed July 1, 2009) and the ongoing preparation for the pending acquisition of Qwest Communications International Inc.

Key Financial Metrics

Note: The filing does not explicitly state a consolidated operating margin percentage; however, operating income for the nine months ended September 30, 2010, was approximately 29.6% of operating revenues.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased significantly year-over-year for the nine-month period ($5.32B vs. $3.15B in 2009), primarily driven by the inclusion of Embarq's results for the full period in 2010 versus only three months in 2009.
• Profitability: Net income attributable to CenturyLink rose to $722.5 million for the nine months ended September 30, 2010, compared to $417.0 million in the prior year. This increase is largely due to the Embarq acquisition and the absence of the one-time extraordinary gain recorded in Q3 2009 ($133.2 million) related to the discontinuance of regulatory accounting.
• Access Line Decline: Total access lines declined by 412,000 (5.9%) during the first nine months of 2010, attributed to competition from wireless services and economic conditions. Management estimates access line loss for the full year 2010 to be between 7.5% and 8.0%.
• Expense Reductions: Operating expenses decreased in the third quarter of 2010 compared to 2009, largely due to the absence of significant one-time severance and transaction costs incurred in 2009 related to the Embarq acquisition.

Guidance, Outlook, and Risks

• Qwest Acquisition: The company is pursuing a stock-for-stock acquisition of Qwest, expected to close in the first half of 2011. Completion is subject to regulatory approvals (FCC and state commissions). A termination fee of $350 million may be payable under certain circumstances.
• 2011 Outlook: Management expects 2011 results to be negatively impacted by:
  • Delays in migrating a wireless carrier's traffic, reducing revenues by an estimated $45-50 million.
  • A decline in Universal Service Fund (USF) receipts of $25-30 million.
  • Launch costs for the Prism IPTV service in additional markets.
• Capital Expenditures: Budgeted capital expenditures for 2010 are expected to be between $825 million and $875 million.
• Dividends: The company paid $2.175 per share in dividends for the nine months ended September 30, 2010. Management intends to maintain an annual dividend of $2.90 per share, though this is subject to cash flow and capital requirements.
• Key Risks:
  • Regulatory: Potential reductions in USF support and network access revenues due to FCC reforms (National Broadband Plan).
  • Competition: Continued loss of access lines to wireless and VoIP providers.
  • Integration: Risks associated with integrating Qwest and the ongoing integration of Embarq, including retention of key personnel and realization of synergies.
  • Debt Ratings: Credit rating agencies have placed CenturyLink's ratings under watch for possible downgrade following the Qwest announcement.

Investor Verification Checklist

• Qwest Merger Status: Verify the timeline and conditions for regulatory approval of the Qwest acquisition and potential termination fees.
• Access Line Trends: Monitor the rate of access line loss against the 7.5-8.0% annual estimate and its impact on voice and network access revenues.
• Regulatory Impact: Assess the final outcome of the FCC's National Broadband Plan and its specific effect on Universal Service Fund receipts and intercarrier compensation.
• Debt and Liquidity: Review the company's ability to service its debt load (approx. $7.6 billion) and fund capital expenditures while maintaining the $2.90 annual dividend, especially given the credit rating watch status.
• Integration Costs: Track the actual integration expenses for both Embarq and the pending Qwest merger against projected synergies.