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Century Link 2014 Results – Hosting & Managed Services Flat

| February 11, 2015

savvisManaged hosting revenues were $145 million, representing a 1.4% increase from fourth quarter 2013, and colocation revenues were $160 million, a 1.9% increase over the same period a year ago.

CenturyLink, Inc. (NYSE: CTL) today reported results for fourth quarter and full-year 2014.

“CenturyLink’s fourth quarter revenues came in slightly lower than anticipated, however our full-year 2014 results were in-line with our guidance and reflect our success in improving core revenue trends and generating strategic revenue growth,” said Glen F. Post III, chief executive officer and president.  “Fourth quarter Business revenues from high-bandwidth data services grew approximately 13% year-over-year.  And in our Consumer segment, strategic revenues grew to $727 million for the quarter.

“As we look to 2015, we anticipate stronger revenue generation in the second half of the year and expect to reach revenue stability for the full year. We believe revenue growth will benefit from strategic product expansion and our recently implemented organizational realignment. This realignment has strengthened our focus on sales and revenue generation as we have combined and expanded our network and managed hosting/cloud sales forces, while enhancing our product portfolio to support strategic revenue growth in the months ahead,” Post concluded.

Fourth Quarter 2014 Highlights

  • Achieved core revenues of $4.05 billion in fourth quarter 2014, a 1.5% year-over-year decline; revenue from high-bandwidth data services provided to business customers, including MPLS[3], Ethernet and Wavelength, grew approximately 13% year-over-year.
  • Generated free cash flow of $373 million, excluding special items and integration-related capital expenditures.
  • Added approximately 18,600 high-speed Internet customers during fourth quarter 2014, ending the period with more than 6.08 million customers in service.
  • Ended the quarter with more than 240,000 CenturyLink® Prism™ TV customers, an increase of nearly 12,900 during fourth quarter 2014.
  • Purchased and retired an additional 2.3 million shares of CenturyLink common stock for nearly $91 million during fourth quarter 2014.

Consolidated Financial Results

Operating revenues for fourth quarter 2014 were $4.44 billion compared to $4.54 billion in fourth quarter 2013. The decline in legacy revenues, primarily driven by access line losses and lower access revenues, as well as lower data integration revenues, were partially offset by increased strategic revenues. The growth of strategic revenues was primarily due to increased business customer demand for high-bandwidth data services, along with year-over-year growth in high-speed Internet and CenturyLink® Prism™ TV customers.

Operating expenses, excluding special items, decreased to $3.86 billion from $3.87 billion in fourth quarter 2013. The year-over-year decrease was primarily driven by lower employee costs, depreciation and amortization expenses and customer premise equipment (CPE) costs, which were partially offset by an unfavorable accounting adjustment for employee healthcare costs recorded in fourth quarter 2014.

Operating cash flow (as defined in our attached supplemental schedules), excluding special items, decreased to $1.71 billion from$1.84 billion in fourth quarter 2013. For fourth quarter 2014, CenturyLink achieved an operating cash flow margin, excluding special items, of 38.5% versus 40.4% in fourth quarter 2013. These decreases were primarily driven by the decline in higher-margin legacy revenues described above.

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 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 fourth quarter 2014 was $340 million compared to Adjusted Net Income of $396 million in fourth quarter 2013. Fourth quarter 2014 Adjusted Diluted EPS was $0.60 compared to $0.68in the year-ago period due to lower operating cash flow, partially offset by favorable state income tax adjustments and the lower number of shares outstanding due to share repurchases during 2014. See the attached schedules for additional information.

Full-Year 2014 Results

For the full-year 2014, operating revenues decreased to $18.0 billion from $18.1 billion in 2013. Operating cash flow, excluding special items, was $7.1 billion in 2014 compared to $7.4 billion in 2013. The decline in operating revenues was driven by the impact of access line losses and lower access revenues, resulting in a decline in legacy revenues, and a decline in strategic private line services. These revenue declines were partially offset by increases in strategic revenues resulting primarily from increased business customer demand for high-bandwidth data services and hosting solutions, along with growth in high-speed Internet and CenturyLink®Prism™ TV customers. The operating cash flow decline was driven by the reduction in higher-margin legacy and private line revenues, which was partially offset by growth in other strategic revenues. Adjusted Net Income, excluding special items, was $1.49 billion in 2014 compared to $1.66 billion in 2013. Adjusted Diluted EPS, excluding special items, was $2.61 in 2014 compared to $2.76in 2013.

GAAP Results – Fourth Quarter and Full-Year

Under generally accepted accounting principles (GAAP), net income for fourth quarter 2014 was $188 million compared to a net income of $239 million for fourth quarter 2013, and diluted earnings per share for fourth quarter 2014 was $0.33 compared to diluted earnings per share of $0.41 for fourth quarter 2013.

Net income under GAAP for full-year 2014 was $772 million compared to a net loss of $239 million for full-year 2013, and diluted earnings per share for full-year 2014 was $1.36 compared to net loss per share of $0.40 for full-year 2013. Full-year 2013 GAAP operating results include the impact of a goodwill impairment charge for a former operating segment.

Additional details regarding the company’s special items for the three and twelve months ended December 31, 2014 and 2013 are provided in the accompanying financial schedules.

Segment Financial Results[4]

As previewed last quarter, CenturyLink has completed the realignment of its organizational structure. Beginning in the fourth quarter 2014, CenturyLink realigned its operating groups into the following two reporting segments:

  • Business. Consists primarily of providing network, IT services, colocation, managed hosting and cloud services to enterprise, wholesale and governmental customers across the U.S. and select international locations.
  • Consumer. Consists primarily of providing products and services to residential consumers across the company’s 37-state footprint.

The organizational realignment combines marketing, sales and sales support under one leader. As part of the realignment, the company also has tasked a leader with responsibilities for the operational excellence of our products and services through the end-to-end engineering, delivery and management of network facilities and data centers. Additionally, one leader now has responsibility for product development and technology across all assets. Overall, these changes are designed to drive increased revenue generation and the rapid deployment of new technologies and solutions.

Business

The Business segment experienced continued strong demand for high-bandwidth data products in the fourth quarter of 2014.

  • Strategic revenues were $1.58 billion in the quarter, a 0.4% increase over fourth quarter 2013, driven by strength in high-bandwidth offerings such as MPLS, Ethernet and Wavelength services, partially offset by declines in low-speed data services revenue.
  • Total revenues were $2.70 billion, a decrease of 3.6% from fourth quarter 2013, as lower legacy, private line and data integration revenues were partially offset by growth in high-bandwidth offerings.
  • High-bandwidth data services grew nearly 13% over fourth quarter 2013 driven by continued strength in sales.
  • Managed hosting revenues were $145 million, representing a 1.4% increase from fourth quarter 2013, and colocation revenues were $160 million, a 1.9% increase over the same period a year ago.

Consumer

The Consumer segment achieved strong year-over-year strategic revenue growth driven primarily by increased high-speed Internet and CenturyLink® Prism™ TV customers.

  • Strategic revenues were $727 million in the quarter, a 6.4% increase over fourth quarter 2013.
  • Total revenues generated were $1.49 billion.
  • Added approximately 12,900 CenturyLink® Prism™ TV customers during fourth quarter 2014, increasing penetration of the approximately 2.4 million addressable homes to 10.2%.

Guidance — Full-Year and First Quarter 2015

CenturyLink anticipates stable operating revenues and core revenues in full-year 2015 compared to full-year 2014 due to expected increases in the level of strategic revenue growth offsetting anticipated legacy revenue declines. Operating cash flow and free cash flow are expected to slightly decline from full-year 2014 primarily driven by the continued decline in higher-margin legacy revenues, the impact of higher expenses associated with the increased growth in strategic revenues and an increase in pension expense due to changes in actuarial assumptions. The company also anticipates lower depreciation and amortization expense for full-year 2015 compared to full-year 2014 driven primarily by the impact of declining amortization of acquisition-related intangible assets and the annual review and update of depreciation rates, which are expected to more than offset increases in depreciation expense associated with continued capital investment. The company expects to incur capital expenditures of approximately $3.0 billion in 2015.

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