Will CenturyLink's Earnings Beat Expectations Again in 1Q16?
CenturyLink’s Core revenue
In the previous part of the series, we learned that Wall Street expects CenturyLink’s (CTL) revenue to fall marginally by ~0.5% year-over-year (or YoY) to reach ~$4.4 billion in 1Q16.
On the date of the release of its 4Q15 results, the US wireline player gave guidance for its core revenue—including its legacy and strategic revenues—in the range of $3.95 billion–$4 billion for 1Q16.
As we can observe in the above chart, in 1Q15, CenturyLink’s core revenue was ~$4.1 billion.
Earlier in 4Q15, the YoY falling trend in CenturyLink’s core revenue continued. This revenue stream fell ~0.5% YoY to ~$4 billion during the quarter. The telecommunications (telecom) company’s strategic services continued to grow during the quarter. Meanwhile, CenturyLink’s legacy revenue continued to shrink.
CenturyLink’s strategic revenue rose ~3% YoY to ~$2.4 billion during 4Q15. CenturyLink’s legacy revenue fell ~5% YoY to ~$1.7 billion during the quarter.
Impact of CenturyLink’s core revenue composition on profitability
During the Deutsche Bank Media, Internet and Telecom Conference, CenturyLink’s chief financial officer Stewart Ewing highlighted the impact of CTL’s changing revenue mix on its profitability.
He said, “The legacy revenue that we’re losing basically is higher margin than the strategic revenue, for the most part, that we’re growing. And the way I like to think about it is, basically, you – for every dollar of legacy revenue that you lose, you need to grow $2 of strategic revenue more or less in order to be able to keep EBITDA flat.”
For diversified exposure to select US telecom companies, you may want to consider investing in the SPDR S&P 500 ETF (SPY). The ETF held a total of ~2.8% in AT&T (T), Verizon (VZ), CenturyLink (CTL), Frontier Communications (FTR), and Level 3 Communications (LVLT) at the end of March 2016.
Browse this series on Market Realist: