CTL - CenturyLink

[Valuehalla]

Steve Blum, telco expert:

 

"Big cable, Telcos take control"

 

https://www.tellusventure.com/blog/the-internet-goes-from-ping-to-pong-as-big-cable-telcos-take-control/

[Valuehalla]

A standard is born for 5G:

 

https://www.tellusventure.com/blog/5g-mobile-tech-finally-moves-from-marketing-hype-to-a-hard-standard/

 

Centurylink and 5G:

 

http://host.madison.com/business/investment/markets-and-stocks/is-g-the-key-to-centurylink-s-turnaround/article_5c669409-4e21-5f88-9546-d4c7056c8134.html

[Valuehalla]

https://seekingalpha.com/article/4122947-whole-storey-centurylink

[Valuehalla]

Temasek Holdings (Fund of Signapur Gov) holds 8,7 % of CTL on 5th Feb 2018

 

http://ir.centurylink.com/Cache/392090289.pdf

 

Temasek was an anker investor of LVLT for many years. So they are still on board.

Their former share of LVLT was 18 %.

LVLT shareholders own 49% of the new entity.

>> So that looks like no big change after the aquisition is done by Temasek.

 

ANKER INVESTORS ARE NOW:

Temasek                                      8,7 %

Corvex (Keith Meister)                  6,7 %

Longleaf (Mason Hawkins)            6,7 %

 

[Valuehalla]

BlackRock Inc.

 

Today a 13G/A filling came out:

 

http://ofccolo.snl.com/cache/392108638.PDF

 

BlackRock holds on 31th December 2017 6,7 % of CTL, which is a strong increase:

 

From old CTL (standalone without LVLT) they were holding 4,25 % on 29th September 2017 according to yahoo

 

 

[gfp]

I imagine they held some LVLT as well and this just reflects the combined stake.  It's like getting excited that Vanguard has taken a big position in your company - it doesn't mean anything

 

BlackRock Inc.

 

Today a 13G/A filling came out:

 

http://ofccolo.snl.com/cache/392108638.PDF

 

BlackRock holds on 31th December 2017 6,7 % of CTL, which is a strong increase:

 

From old CTL (standalone without LVLT) they were holding 4,25 % on 29th September 2017 according to yahoo

[Valuehalla]

Time to be excited about the share of BlackRock in new CTL:

 

Sure, the mentioned 6,7 % holding from BlackRock are for the combined new CTL entity.

 

BlackRock holdings in old standalone companies were:

Shares of CTL were 4,25 %   

Sahres of LVLT were 5,04 %

AVG = 4,637 % ( LVLT 49 % and CTL 51 % in new entity)

 

So its a clear increase! They increased the stake by 44 % !

 

[kab60]

And so somebody else must have sold... Really, it is a huge nonevent.

[brker_guy]

I am surprised that no one has posted this yet:

 

https://seekingalpha.com/article/4141549-miller-value-partners-opportunity-equity-q4-2017-letter-value-nothing

 

[Valuehalla]

Q4 Figures are out:

 

http://ir.centurylink.com/file/Index?KeyFile=392193775

 

They expect for 2018 a FCF after dividends of 805 M to 1,05 B, which mean a FCF in total of 3,15B to 3,35 B, compared to a marketcap of 18,79 B = ratio of just 5,6 to 5,7 = 16,8 % to 17,8 %

 

Dividend payout ratio lower than 73 %, so dividend is safe for 2018.

 

CTL was up app 10 % in aftertrading

 

LVLT

LVLT standalone figures were excellent:

- Total Revenue Q4=2,11B increased in Q4 3,8 % YoY.... and Core Network Revenue (Q4=2,017B) increased 4,3 % YoY and even 2,7 % from Q3 to Q4 !

- FCF very strong for Q4 353 M + 33 % YoY  (Q3 was already very strong with 369M), so it looks like that just LVLT standalone can provide 1,4 to 1,5 B to the FCF of the whole entity.

- LVLT Total revenue Q4 = 2,11 B

CTL

CTL standalone figures were good:

I compare the CTL revenue quarter to quarter, because there was the sale of the colocation & data centers in 2017: that makes it more transparent to elaborate, if and which part of the revenue is shrinking or not:

- Strategic revenue 1,905 B is stable (even slightly increasing by 0,7% from Q3 to Q4) as projected here in CoBF in the past >> see my post on 20th Nov.; so no lost in this revenue segment

- Legacy revenue 1,633 B is shrinking ( - 2,4 % from Q3 to Q4 >> = - 9,2 % shrinking YoY) as projected here in the CoBF in the past >> see my post on 20th Nov; so no surprise

- Other Revenue and Dataintegration revenue both app. stable Q to Q and YoY (313 M and 113 M) 

- CTL Total revenue Q4 = 3,964B

 

LVLT + CTL Total Revenue in Q4 2017 = 6,074 B

 

Conference Call:

- Taxreform will lower payments for taxes massively in the next 5 years

- Management is willing and able to pay the dividend

- Pointing out that LVLT had strong results in Q4

- No big surprises in the integration, which is on track, synergy targets will be reached

- They expect increasing EBITDA over the next few years and plan to drive down leverage-ratio in the coming years to 3 to 4 times ratio

- weighted average cost of debt is currently about 5.7% with 65% being fix rate and 35% being variable-rate debt

- 9B of NOLs

- Shrinking legacy consumer business is now 25 % of total revenue, they try to improve it: simplifying and cutting costs. No remarks to maybe sell this segment. The "Price for Life" product is successfull with more than 1 M subscribers. They want push that.

 

Transcript:

https://seekingalpha.com/article/4146897-centurylink-ctl-q4-2017-results-earnings-call-transcript?page=1

 

Everything looks good to me, I am happy to sit on a big position of CTL, waiting for the next dividend payment and an increase in stockprice.

 

 

[Valuehalla]

Outlook / Fundamentals

 

Based on yesterdays closing price of 17,58 US$ the marketcap of CTL is 18,79B.

The dividendrate is 12,28 %, based on an annual dividend of 2,16 US$.

 

Here is the outlook given beside the Q4 figures:

 

FCF Free Cash Flow    3,15 to 3,35 B before dividend payments (=2,3 B pa, so payout ratio less than 73 %)

EBITDA                    8,75 to 8,95 B

 

Management expects growing EBITDA and FCF over the next years. Revenue is stable. They are willing to keep the dividend over the next years. The management (Storey and Patel) proved their ability to integrate, grow EBITDA and grow FCF during the last years in LVLT.

 

I am totally positive about the future of CTL and recommand it again as a great valueinvestment.

 

 

 

 

 

[Guest longinvestor]

Guess who's back into CTL? Prem / Fairfax!. Bought $25 Million at $17. Looks like oldtimers coming back. Bill Miller did as well.

[walkie518]

Both companies had warts, but it looks like Storey is pulling it together!

[petec]

I have about 15 years of telecom mgmt experience and have also invested a good amount in the space. From dealing with both of these companies neither are very well run.  This isn't meant to be overly negative, I just feel this is a case where people look at things via a spreasheet rather than from experience in the marketplace.

 

Level 3 generally has a good quality product, but they are notoriously difficult to deal with and that is going to pressure them quite a bit. Companies like Cogent are much more efficent.  Cogent products are comparable, pricing is typically lower and they deliver solutions in a shorter time frame. As a customer are you going to take the 100Mb fiber connection that takes 10 days (sign up is all digital) to deliver or 90 days of slogging through paperwork and third party contractors when they are priced the same?  In my view Level 3's Internet offerings are going to be pinched over time. They are not as high quality as AT&T and they are getting outcompeted by more nimble players on the other end of the market. Bandwidth pricing is also dropping constantly.

 

Their legacy businesses like Voice are also losing market share to companies that deliver more efficent mechanisms to add/remove/change services.  As an example, I know a major company that has had this experience. Provisioning a new number on L3 takes 2-3 days in many cases. Whereas with a new company they are doing business with the process is literally instant. To top it off many of L3 systems do not work on browsers other than IE, things like the old WilTel portal for example. Assuming pricing and quality are close for what has become a commodity which company do you think will win share over time.

 

Again, their quality is very good, but their business processes/contracts get in the way of monetizing these assets.

 

CTL is in my opinion even worse than L3. In general lower quality products than L3 and so many legacy rolled-up assets and systems. Dealing with them for anything is a tremendous struggle and I think this acquisition is really going to further muddy those waters.

 

With out solid systems it is really hard to sell enterprise and wholesale well at the same time. AT&T is currently the best at this in the market and they are really trying to innovate to improve their process. They have a significant jump on an entity like L3/CTL in this regard.

 

So to keep this from rambling on, L3 has some respect but their business processes leave much to be desired. It would be interesting if someone had a list of the number of logos rolled up in this deal. Just off the top of my head

 

Broawing

WilTel

ICG

Adelphia

Focal

Qwest

Embarq

Global Crossing

TW telecom

 

None of these assets have been intergrated well in my opinion.  Roll-ups are tricky beasts and if business is not great they are a perfect way to distract investors. I would have preferred to see Level 3 focus on what it had than join with CenturyLink.

 

Just getting started on this one. Txvalue, did you read the 4q call? If so does it change your opinion on any of the above? I am struck by a) how Storey dominated the call and b) how focussed they seem to be on reorganising the company to deal with at least some of the issues you mention. Interested in your thoughts.

[txvalue]

Storey said they are improving or have already improved much of what I mentioned. It is still early, but I have only seen the combining of sales teams (with some new cross-selling) and some backbone integration. The more difficult parts of the integration are still "on the road map."

 

I don't mind investing in messy situations, but I'm still on the sidelines. I'd view the call as a small incremental positive. I think it is a good that he is aware of the company's short comings but I would like to see more tangible integration and improvement.

[petec]

Does anyone have a nice simple graphic or set of stats to help me understand how much this industry has consolidated over time?

[kab60]

I have about 15 years of telecom mgmt experience and have also invested a good amount in the space. From dealing with both of these companies neither are very well run.  This isn't meant to be overly negative, I just feel this is a case where people look at things via a spreasheet rather than from experience in the marketplace.

 

Level 3 generally has a good quality product, but they are notoriously difficult to deal with and that is going to pressure them quite a bit. Companies like Cogent are much more efficent.  Cogent products are comparable, pricing is typically lower and they deliver solutions in a shorter time frame. As a customer are you going to take the 100Mb fiber connection that takes 10 days (sign up is all digital) to deliver or 90 days of slogging through paperwork and third party contractors when they are priced the same?  In my view Level 3's Internet offerings are going to be pinched over time. They are not as high quality as AT&T and they are getting outcompeted by more nimble players on the other end of the market. Bandwidth pricing is also dropping constantly.

 

Their legacy businesses like Voice are also losing market share to companies that deliver more efficent mechanisms to add/remove/change services.  As an example, I know a major company that has had this experience. Provisioning a new number on L3 takes 2-3 days in many cases. Whereas with a new company they are doing business with the process is literally instant. To top it off many of L3 systems do not work on browsers other than IE, things like the old WilTel portal for example. Assuming pricing and quality are close for what has become a commodity which company do you think will win share over time.

 

Again, their quality is very good, but their business processes/contracts get in the way of monetizing these assets.

 

CTL is in my opinion even worse than L3. In general lower quality products than L3 and so many legacy rolled-up assets and systems. Dealing with them for anything is a tremendous struggle and I think this acquisition is really going to further muddy those waters.

 

With out solid systems it is really hard to sell enterprise and wholesale well at the same time. AT&T is currently the best at this in the market and they are really trying to innovate to improve their process. They have a significant jump on an entity like L3/CTL in this regard.

 

So to keep this from rambling on, L3 has some respect but their business processes leave much to be desired. It would be interesting if someone had a list of the number of logos rolled up in this deal. Just off the top of my head

 

Broawing

WilTel

ICG

Adelphia

Focal

Qwest

Embarq

Global Crossing

TW telecom

 

None of these assets have been intergrated well in my opinion.  Roll-ups are tricky beasts and if business is not great they are a perfect way to distract investors. I would have preferred to see Level 3 focus on what it had than join with CenturyLink.

 

Just getting started on this one. Txvalue, did you read the 4q call? If so does it change your opinion on any of the above? I am struck by a) how Storey dominated the call and b) how focussed they seem to be on reorganising the company to deal with at least some of the issues you mention. Interested in your thoughts.

Thanks a lot for the insight. I'm on the sideline but following. Inverting what you said, can't that be a positive? I mean, the numbers don't look too bad, and it seems there's still lots of stuff they can still fix (one obviously needs to think they'll be able).

[A_Hamilton]

Does anyone have a nice simple graphic or set of stats to help me understand how much this industry has consolidated over time?

 

Slides 5 and 6

 

https://www.sec.gov/Archives/edgar/data/18926/000101143817000194/exhibit_3.htm

 

[petec]

Many thanks.

[txvalue]

In terms of inverting, you are correct there is a large opportunity.  As I said I am waiting for proof to start to trickle out - I think in the IT world people often think that synergy is easier to achieve than it really is in practice.

 

If this was a story of two inefficently run banks saddled with lots of debt and a huge payout ratio I don't think investors would be as excited for the merger.

 

Storey did ok as CEO this is not a knock on him - its just his M.O. has been to merge or buy things like Global Crossing rather than really be a roll up the sleeves operational guy in my opinion.

[Guest longinvestor]

In terms of inverting, you are correct there is a large opportunity.  As I said I am waiting for proof to start to trickle out - I think in the IT world people often think that synergy is easier to achieve than it really is in practice.

 

If this was a story of two inefficently run banks saddled with lots of debt and a huge payout ratio I don't think investors would be as excited for the merger.

 

Storey did ok as CEO this is not a knock on him - its just his M.O. has been to merge or buy things like Global Crossing rather than really be a roll up the sleeves operational guy in my opinion.

Actually, Storey brought tremendous operational expertise to the erstwhile LVLT. It was so shoddily run before him by Crowe (the visionary >:() and OHara. The only reason the company survived (imo) is because of the operational discipline brought by Storey.  Mergers have gone on for a long time at LVLT (as one can see on the Slide deck of Ira Sohn); Even here, Storey's operational discipline made for good integration of GLBC and TWTC (Crowe screwed them up in the past) and thereby good earning /FCF performance and in turn the stock appreciation since 2013. If there is a shortcoming, it is that Storey has not shown revenue growth. To be fair, he is a straight shooter and never promised revenue growth. Only FCF growth which he delivered. That continues at CTL and looks to be the Stor(e)y going forward.

[Valuehalla]

Thanks for all comments.

 

Jeff Storey also showed revenue growth as CEO of LVLT: the last Q4 2017 LVLT standalone figures were excellent:

Total Revenue increased in Q4 4,3 % YoY.... and Core Network Revenue increased even 2,7 % from Q3 to Q4 !

[Valuehalla]

GREAT NEWS: Jeff Storey will take over in May 2018! Glen Post will retire more early than announced.

 

http://ir.centurylink.com/file/Index?KeyFile=392468829

 

Thanks to Glen and Jeff for the great deal they have done for us investors.

The results in stock price will be seen soon.

[Valuehalla]

Good article about CTL:

 

https://seekingalpha.com/article/4155554-take-centurylink-free-cash-flow-dividend?auth_param=1emn1k:1dad5jk:39cc0a34f6fb2269d81c3254b4ef9d49&uprof=44&dr=1

 

"Management would not give revenue guidance - but they did indirectly. In the first outlook they define capex as 16% of revenue then give us capex in their free cash flow outlook. We calculate the revenue range: $23.75 to $24.37 billion. A more important metric given (indirectly) is operating income. We get pretax income by combining net income and tax expense guidance. Add total other expense and integration related expense and we get an operating income range of $3.04 to $3.36 billion."

[petec]

I'm not sure you can draw much from that because guidance is for roughly 16% capex and that introduces a huge error term:

3800/16.4%=23,170 for a 4% drop.

3900/15.5%=25,161 for 4.3% growth.

 

I think anything around $23.9bn would be a great result and would show revenues are turning.

 

More important to me was the fact that the FCF guidance isn't sustainable. They only disguised this during Q&A on the call but the $3.15-$3.35bn includes c. $550m of tax refunds (not sure if this is repeating), benefit from accelerating bonus payments due to the merger (which is not repeating), and working capital benefits which might be partially repeatable in 2019 but not thereafter.

 

So sustainable FCF is more like $2.7bn (maybe a bit higher if the tax refunds are sustainable - anyone know?). That assumes synergies and presumably some revenue shrinkage in 2018. In 2019 you get the full synergy run rate which will likely be enough to offset say 1% of revenue slippage. By 2020 you need growing revenues to grow FCF, is my guess.

 

$2.7bn is a 14% FCF yield and leaves $400m a year to de-lever, and it's highly sensitive to small changes in margins and revenues. I wouldn't be surprised if Storey cuts the dividend. His reputation is not attached to it (as Post's is) and he will get a higher multiple in time if he accelerates de-leverage due to lower risk. But the stock will drop on the day - might be a good opportunity.

 

Then again, if he's confident he can get revenues growing, there's no need. Will be interesting to see.