CenturyLink is in a race against time and technology

In the new century, the old wired phone seems to have less relevance than ever. More than a third of U.S. homes now have only cellphones.

CenturyLink, Minnesota's largest telephone company, is acutely aware of this trend. In the third quarter of 2012 alone, CenturyLink's operating revenue dropped $25 million, mainly because of the continuing loss of individual telephone lines, the company said in government filings.

While declining revenue from traditional phone service has plagued CenturyLink and other traditional telephone companies for several years, CenturyLink's vulnerability increased when it acquired the Twin Cities' largest phone company, Denver-based Qwest Communications, nearly two years ago.

To combat the problem, CenturyLink has sought to bolster revenue through diversification into business services such as cloud computing. But so far that hasn't made up for all the revenue loss in its traditional phone business.

"CenturyLink is succeeding in slowing the decline in revenue, but they are losing some high-profit-margin business with the decline in home phone lines," said Donna Jaegers, an analyst with D.A. Davidson & Co. of Great Falls, Mont.

To keep customers, CenturyLink has offered discounted bundles of services that fetch lower profit margins, including video services that require CenturyLink to buy expensive programming content, Jaegers said.

To keep investors happy, CenturyLink offers a shareholders a fat dividend -- the most attractive feature of a stock whose price hasn't appreciated much in several years. The hefty annual dividend of $2.90 a share costs the company dearly; it soaked up 50 to 55 percent of CenturyLink's free cash flow in 2011 and 2012.

"If they cut the dividend, the stock price would go lower," said analyst Jaegers. "We rank CenturyLink stock neutral, because all you get is the dividend -- there is no capital appreciation."

CenturyLink officials, who declined to be interviewed, haven't said publicly what they will do about the dividend. In government documents, the firm says it has enough money to continue paying the dividend. But it also says it can't promise investors that the dividend won't be reduced in the future.

CenturyLink has said in the government filings that it lost 6 percent of its individual telephone lines in the 12 months ended last September, a decline of 857,000 lines. It still had 13.9 million individual telephone lines in 37 states.

Including acquisitions, CenturyLink's revenue dropped 5.5 percent in 2010 and less than 4 percent in 2011, to $15.4 billion. Revenue is expected to have dropped less than 2 percent in 2012 (the actual numbers will be reported Feb. 13), and revenue is projected to stabilize by 2014, spokeswoman Joanna Hjelmeland said in an e-mail.

The company remains solidly profitable, with 2011 earnings of $573 million.

A solid performer

Despite the loss of residential telephone lines, CenturyLink seems to be doing a good job of running the former Qwest telephone operations in Minnesota.

"Since the merger, CenturyLink has been living up to all the obligations that were worked out in the merger," said Mark Oberlander, the telecom manager at the Minnesota Public Utilities Commission, which regulates telephone service in the state.

There have been no major complaints from CenturyLink's competitors, who were outspoken during the merger talks about preserving their connections to the former Qwest network, he said.

An attorney who has represented some of those competitors agrees.

"I haven't heard the competing phone companies complaining about anything recently," said Christopher Sandberg of Lockridge Grindal Nauen in Minneapolis.

That seems to be an improvement from Qwest, which sometimes had rocky relationships with competitors who needed to connect to its network.

Acquisition strategy

CenturyLink is in a race against both time and technology.

"CenturyLink is doing as much as it can to get a really good position in cloud computing, and with the former Qwest fiber network they can offer business services outside of their local telephone territory," said Milda Hedblom, a telecom consultant and a professor of politics and communications at Augsburg College. "But I don't know if they can grow fast enough to keep the dividend."

That concern is echoed by Bill Martorelli, an analyst at Forrester Research in Cambridge, Mass., who is familiar with Missouri-based Savvis, a CenturyLink acquisition that positions it in cloud computing, in which some or all of a company's information technology is outsourced to a remote data center.

"The question is whether Savvis can grow fast enough to offset the weakness in CenturyLink's traditional telephone business," Martorelli said.

Jaegers agrees: "CenturyLink needs to do better ... in going after business customers in their telephone territory. There has been a revolving door of people in charge of that business. One of the challenges ... is to convince potential business customers to come to a phone company for cloud computing services. Phone companies do not always have the most cutting-edge brand image."

Steve Alexander • 612-673-4553