CenturyLink (CTL) Cut To Sell, Local Phone Business A Drag

On Oct 4, regional telecom operator in the U.S., CenturyLink Inc (NYSE:CTL). (NYSE:T) was downgraded by a notch to a Zacks Rank #4 (Sell). The downgrade was a result of consistent losses in access lines and legacy voice services of the company on an organic basis.

Losses

CenturyLink’s core fixed-line local phone business has been slowing down significantly, which is evident from the persistent loss incurred in access lines and legacy voice services on an organic basis. As of Jun 30, 2016, total access lines were 11.413 million, down 5.7% year over year, which accounted for the loss of 198,000 access lines. Quarterly total revenue of $4,398 million was down 0.5% year over year, of which, strategic revenues totaled $2,030 million, up 5.2% year over year whereas legacy revenues accounted for $1,938 million, down 7.2%. The consumer segment revenues also declined 0.6% year over year to $1,494 million followed by a 2.3% fall in business segment revenues to $2,597 million in the second quarter of 2016.

The dismal performance was primarily attributed to the substitution of traditional wireline telephone services by wireless and other competitive offerings and lower long distance minutes of use. In addition to large telecommunications providers, the company faces intense competition from cable TV operators and other wireless companies which aggressively offer traditional voice service over their networks. Improvements in the quality of VoIP services have enabled cable TV, Internet and telephone companies to offer services at attractive price points.

Moreover, loss of high-speed broadband subscribers and falling low-bandwidth data services revenues raise concern. Further, intensifying competition, federal regulations and the constant need to upgrade technology remain potent headwinds.

Retrenchment Plans

In Sep 2016, CenturyLink announced plans of cutting 8% of its labor force which accounts to almost 3,000 to 3,500 workers. This decision reflects the company’s need to reduce expenditures and deal with the decline in legacy voice service revenues. Due to the decline in legacy voice revenues, the company has been incurring overall losses to the tune of $600 million every year. Unlike other U.S. telecom companies like AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) who have diversified their businesses into wireless and wireline segments, CenturyLink’s data centre business which has been posting negative results is expected to witness an overall decline of 2% this year, as estimated by analysts.

CenturyLink will initially ask its employees to voluntarily leave the organization before it starts with its layoff process. Reports state that the company had a workforce of nearly 43,000 as of Jun 30, 2016. Thus, the company seems to be focused on reorienting its cost structure apart from achieving other growth targets.

Positives and Recent Developments

CenturyLink’s Prism TV services are doing considerably well and should bring in substantial revenues. In the second quarter of 2016, the company added nearly 9000 Prism TV customers, ending the period with roughly 311,000 customers, up 20.5% year over year. CenturyLink’s investment in the fiber-to-the-tower (FTTT) has expanded its fiber-based backhaul services. The company is also focused on establishing itself as a global leader in cloud infrastructure and hosted IT solutions arena designed for enterprise customers. The company is also improving operating efficiency through a number of methods including network simplification and rationalization.

Meanwhile, the company is also planning to launch 17 Channel over the top (OTT) services in the beginning of 2017 wherein customers will be able to access 17 channels coupled with a set of local channels.

Stock to Consider

A better-ranked telecommunication stock is NTT DOCOMO, Inc. (NYSE:DCM) , with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The current year earnings estimates for NTT DOCOMO have improved 7.27% over the last 60 days.

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