Telecommunications giant Centurylink (NYSE:CTL) is set to release fourth-quarter 2016 results after market closes on Feb. 8, 2017. And with shares down nearly 20% since last quarter's report in late October -- when Centurylink notably announced its massive agreement to acquire Level 3 Communications (NYSE:LVLT) -- you can be sure the market will be listening closely to what it says.
Let's take a deeper look, then, at what investors can expect to hear this time around.
First, CenturyLink's most recent guidance calls for fourth-quarter operating revenue in the range of $4.28 billion to $4.34 billion (down from $4.48 billion in last year's fourth quarter), and core revenue (a non-GAAP measure defined as strategic revenue plus legacy revenue) of $3.86 billion to $3.92 billion. CenturyLink also told investors to expect quarterly operating cash flow of $1.58 billion to $1.64 billion and adjusted earnings per diluted share in the range of $0.53 to $0.59 (down from $0.80 per share in the same year-ago period).
For perspective -- and though we usually don't pay close attention to Wall Street's quarterly demands -- analysts' consensus estimates predict CenturyLink's quarterly operating revenue will decline 3.4%, to $4.32 billion and translate to adjusted earnings of $0.57 per diluted share.
But CenturyLink's business is about more than just the headline numbers, so investors should listen for color on the underlying drivers of its results. To that end, CenturyLink will break its results into two primary segments, including business and consumer segment revenue.
Within the business segment, for example, third-quarter revenue fell 1.1% year over year, to $2.61 billion, as declines in legacy revenue were partially offset by 6% growth in high-bandwidth data revenue. Strategic business revenue climbed 5.1%, to $1.23 billion. Within the consumer segment, Q3 revenue fell 2.5%, to $1.47 billion, as legacy voice revenue declines were partially offset by growth in broadband and Prism TV revenue. Consumer strategic revenue also rose 3.4%, to $789 million, in Q3.
On a consolidated basis in the fourth quarter, management noted that expected declines in legacy and data integration (CPE) revenue should more than offset growth in strategic revenue once again. In addition, operating cash flow will remain roughly flat on a year-over-year basis in the fourth quarter, primarily as seasonality of outside plant maintenance and utility costs will be offset by lower personnel and CPE costs.
The $34 billion elephant in the room
Of course, we can't ignore CenturyLink's impending $34 billion acquisition (including the debt CenturyLink will assume) of Level 3 Communications. This deal is more a merger of equals than anything. But recall while Level 3 Communications stock popped on news of the deal, primarily given the healthy acquisition premium its investors will enjoy, CenturyLink stock simultaneously plunged 11% as investors worried that the agreed price was too steep to pay.
As I suggested in a more bullish article last month, however, CenturyLink and Level 3 expect to enjoy several significant new advantages from the merger. Among those advantages are massively increased scale, with the companies' combined fiber networks giving them a presence in over 60 countries. And thanks to Level 3's almost $10 billion in aggregate net operating losses, CenturyLink should also enjoy significantly improved free cash flow and a lower payout ratio to support its lofty dividend (which yields around 8.7% annually at today's prices).
What's more, CenturyLink expects the combination to generate $975 million in annual run-rate cash synergies resulting from operational efficiency measures, systems consolidation, and duplicate function removal. But those synergies are also expected to result in one-time costs of $685 million, to be incurred between the deal's expected closing later this year and 2019 assuming it receives the necessary shareholder and regulatory approval.
As it stands, investors should listen for any updates to these figures and timelines to ensure the merger is still proceeding as planned.
Finally, if CenturyLink's fourth-quarter report last year is any indication, listen for CenturyLink to provide financial guidance for both the current first quarter and full year of 2017. Wall Street is modeling first-quarter operating revenue of $4.31 billion and adjusted earnings of $0.59 per share. For the full year, consensus estimates predict CenturyLink will see revenue decline 1.6% year over year, to $17.22 billion (assuming it meets analysts' current 2016 estimates), and translate to adjusted earnings of $2.29 per share.
Whether CenturyLink lives up to those expectations remains to be seen. But even if it doesn't -- and for better or worse -- we can be fairly certain the market will more heavily weigh the impact of any updates to the status of its blockbuster merger with Level 3.