CenturyLink Loses Sales Again and Contemplates Offloading Its Consumer Business

Management’s controversial decisions after the 2018 report now make more sense.

Nicholas Rossolillo
Nicholas Rossolillo
May 11, 2019 at 2:14PM
Technology and Telecom

Besides trying to stop the hemorrhaging of its communications business, CenturyLink's (NYSE:CTL) management has also found itself embroiled in investor debate over some of its recent decisions. These include more than halving the company's dividend payout, paying down debt, and investing in areas of the business that are still growing. You can read more about that here.

In its first-quarter 2019 report released on May 8, CenturyLink added another potential flashpoint to the discussion. Management says it's beginning an evaluation of its consumer business to see if there are better ways to return value to shareholders than continuing to operate the struggling segment.

What CenturyLink is up to

In late 2017, CenturyLink completed the acquisition of former rival Level 3 Communications. Ever since, the company has been busy consolidating operations and reducing expenses. The initiative has been successful in its intended purpose, helping the new CenturyLink go from barely profitable to generating $3.86 billion in free cash flow in 2018 on revenues of $23.4 billion.

Free cash flow is expected to be lower this year, but that's due to higher capital expenditures to update CenturyLink's services. The top-line revenue figure is still stubbornly in decline, in large part because of lost consumer voice and video connections business. Thus, the company may be ready for some change and announced it has enlisted the help of advisors to explore alternatives for the consumer business segment.

Here's what CEO Jeff Storey had to say about it:

Generally speaking in making these assessments, the more enterprise focused, network-related, fiber-based and growth oriented product line is the more core [business] to our future. As I briefly mentioned on our fourth quarter call, we've been open to looking at assets like our consumer business. We now have engaged advisors to assist us in that review. Let me be clear, we are early in what I expect to be a lengthy and complex process. During our review, we will not modify our normal operations or our investment patterns. I can't predict the outcome or the timing of this work or if any transactions will come from it at all. Our focus though is value maximization for shareholders. If there are better paths to create more value with these assets, we will pursue them.

It's not as if consumer services aren't contributing anything to CenturyLink. Storey admits they are still profitable, and the company is fine continuing to milk them for what they're worth in the years ahead. However, the fact is that the communications industry is undergoing rapid change, and CenturyLink's infrastructure isn't built to address many of those changes -- at least not for individual households.

The back of an internet modem with a yellow ethernet cable plugged into it.

Image source: Getty Images.

Either way, business is ok...for now

The good news is that CenturyLink has valuable assets that play a key role in internet connectivity, and the company thinks it can return to overall growth if it continues to focus on investing in new enterprise solutions. At any rate, first-quarter 2019 results were down slightly on sales, and though free cash flow fell from a year ago, management reiterated its full-year 2019 guidance for $3.10 to $3.40 billion -- which will still cover the current dividend yield of 8.3% easily enough.

Metric

Q1 2019

Q2 2018

Change (YOY)

Revenue

$5.65 billion

$5.95 billion

(5%)

Cost of services and products

$2.52 billion

$2.80 billion

(10%)

SG&A expenses

$932 million

$1.11 billion

(16%)

Capital expenditures

$931 million

$805 million

16%

Free cash flow

$251 million

$862 million

(71%)

YOY = year over year. SG&A = selling, general and administrative expenses. Data source: CenturyLink.

With first-quarter results in context, selling off underperforming segments may make sense. CenturyLink does continue to benefit from cost reductions, which makes the newly reduced dividend payout safe for the time being. In fact, perhaps the dividend cut was a precursor to the strategic review, giving management the breathing room it needs to maneuver the business if slimming down is the ultimate path forward.

The current reality is that the communications company is far from out of the woods. Business is still in decline, but getting rid of the fast-dwindling consumer lines might do the trick.