Updated: Aug 8, 2020
Management (CTL) pointed to revenue declines occurring over the integration process was due to cutting unprofitable revenue in various past conference calls. How much of the decline caused by cutting unprofitable revenue is not spelled out but the inference is it was a major factor. The Centurylink side of the merger with Level 3 is where the majority, if not all, of the unprofitable revenue occurred.
We need to separate out the CTL operations from the Level 3 operations to get a clear picture. Below is a chart reflecting EBITDA and FCF for each entity (CTL and Level 3 Parent):
CTL Revenue has been declining through the entire period shown above as illustrated in the revenue breakout below. During the second half of 2017 through the first half of 2019 CTL EBITDA improved as revenue declines accelerated which might be expected if unprofitable revenue was being terminated. Level 3 EBITDA was about flat. Based on the slightly downward EBITDA most, if not all unprofitable revenue should now be in the past.
What about revenue going forward?
CTL revenue continued its steep decline in the second half of 2019 and slowed going into 1Q20. The second half of 2019 probably reflected a mix of both profitable and unprofitable revenue losses resulting in a flattening to downward CTL EBITDA trend, all the while Level 3 EBITDA and revenue remaining flat.
CTL 1Q20 revenue seems to be returning to a path of decline like 2017. They can offset these declines by small gross margin increases and lower interest expenses. This will keep EBITDA flat so do not expect any major stock move until the revenue picture becomes clearer. The stock is in the dumpster due to the risk of perpetual revenue declines which eventually will push the trends down for EBITDA and FCF if not reversed although FCF is influenced on capex decisions. Some analyst and investor targets can be viewed or added here.
Here is one scenario where revenues decline slow through 2023 and EBITDA remains flattish for the combined entities. Exceeding these projections will push the stock higher while under-performing will be a big cause for concern.
Management could provide some clarity on revenue but will not. Why, because in the past management stated several times, they will not give long-term guidance on the top line. I believe it is a policy they have been following for some time now and I have seen nothing that tells me this will change. Maybe they will, hope so. In the meantime, we can only speculate based on performance. My model goes out to 2023 and I do not see revenue declines reversing, slowing yes but not reversing. We will see if they can meet or exceed these expectations. Consistent under-performing from here (my numbers above) would start to be a major concern.
On a positive note the fact the Level 3 side has remained flattish and CTL 1Q20 revenue declines started to slow is encouraging along with an attractive 10% dividend ($1.00) tied to stable EBITDA and FCF for the time being, however with all guidance pulled due to Covid-19 it is anyone’s guess where this year takes us.