CenturyLink Earnings Show the Turnaround Is Underway

Long-suffering CenturyLink (NYSE: CTL) shareholders were treated to a positive earnings report and double-digit move higher in the stock earlier this month. The large telecom closed its merger with Level 3 Communications last November, and has been showing continued progress integrating Level 3's assets, achieving ahead-of-schedule cost savings. Since CenturyLink was thought to be a declining business with a problematic debt load, fulfilling at least one promise of the merger (huge cost savings) went a long way toward boosting management's credibility.

Yet even after the big move, CenturyLink's stock continues to trade below levels seen a few years ago and more progress on new CEO Jeff Storey's turnaround plan could pay off big in the future.

Synergies, synergies, synergies

The first stage of CenturyLink's turnaround revolves around cost-cutting synergies. CenturyLink's target of $850 million is significant, at almost 10% of the this year's forecast earnings before interest, taxes, depreciation, and amortization (EBITDA).

Management claims $675 million has already been achieved just a few quarters into the merger. That's a surprising amount of progress, given that management previously expected it would take three years to achieve those kinds of savings. The ahead-of-schedule synergies allowed CenturyLink to grow its adjusted EBITDA margin from 35.7% to 38.5% in the quarter, increasing profits even as revenue fell. Management suggested longer-term adjusted EBITDA margin would be in the low 40s.

Combining the product portfolio

While CenturyLink and Level 3 were both large telecoms prior to the merger, each company had its own strengths and weaknesses. Another benefit of the merger is that the company can now combine the best of both into a single, streamlined menu of products and services for enterprise customers.

CenturyLink is now the largest telecom mostly focused on enterprise, with competitors such as AT&T and Comcast more consumer- and wireless-focused. Storey said during the Aug. 8 conference call with analysts [transcript via Seeking Alpha]:

And therein lies the plan: to become a one-stop shop for increasingly complex enterprise IT networking environments, and to take share from large incumbents. Storey cited a recent large customer win as evidence the strategy is working: General Mills, which picked CenturyLink as its new primary provider over its legacy provider last quarter.

Don't forget the consumer

Investors even got decent news on CenturyLink's left-for-dead consumer broadband business. Consumer accounts for only 23% of the company's revenue. It has been shedding subscribers, and the company even discontinued its own video products this year (CenturyLink now offers AT&T's DIRECTV as its video option).

That being said, CenturyLink is still investing in the business, selectively upgrading broadband speeds with fiber optic cable. That's for two reasons: One, while the overall company shed 80,000 broadband consumers last quarter, CenturyLink gained 54,000 at higher-speed offerings (and lost 134,000 at speeds under 20 megabits per second).

Not only will boosting speeds potentially help win over more consumers, but urban and suburban fiber footprints can potentially be used in upcoming 5G small cell deployments, which use high-frequency spectrum that needs to be close to the end customer, and thus require deeper fiber optic footprints.

In addition, CenturyLink's new "Price for Life" deal, which offers consumers an unchanging price for broadband (as long as they don't ever switch), is gaining fans. Rolled out just last fall, over 40% of the company's consumer broadband business is now on "Price for Life."

With newfound scale and 5G coming, investors shouldn't necessarily count out CenturyLink's consumer business going forward.

The story looks intact

CenturyLink investors, some illustrious activists included, have to be happy about the company's earnings report. The past quarter showed the turnaround plan is ahead of schedule, and with the stock up 36% so far this year, along with a 10% dividend yield at recent prices, things are looking good for the believers.

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Billy Duberstein owns shares of T and CenturyLink. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.