5 Things To Know About How COVID-19 Affected CenturyLink's Q1 2020

CenturyLink CEO Jeff Storey is "especially concerned" about SMB customers, but the carrier's fiber network and advanced services, like security, edge computing, and managed services, will keep CenturyLink relevant in the post-COVID-19 world, Storey said during CenturyLink's Q1 2020 earnings call.

The Struggling SMB Space

The COVID-19 coronavirus has dramatically shaken up the business climate this past quarter, and the country's biggest telecoms aren't exempt.

Monroe, La.-based CenturyLink generates about three-quarters of its revenue from business services, a segment that has been stressed in recent quarters due to revenue at small and medium-sized businesses. Q1 2020, which ended on March 31, did not buck that trend, but CenturyLink CEO Jeff Storey (pictured) is "especially concerned' about SMBs now in light of the pandemic.

With shrinking SMB, Wholesale, and Consumer revenues, CenturyLink's fiscal quarter was held steady by enterprise business, which remained relatively flat. The carrier believes that the need for digital transformation will be a big area of opportunity moving forward as the coronavirus forces more businesses and school campuses to re-imagine their environments.

From how CenturyLink is handling the pandemic internally, how the network is holding up, and how the carrier's business segments fared, here are five things you need to know that came out of CenturyLink's Q1 2020 earnings call on Wednesday night.

CenturyLink's Response To COVID-19

CenturyLink joins rivals AT&T, Comcast, and Verizon on the Federal Communications Commission’s Keep America Connected pledge through June, meaning that the telecom has suspended usage limits and committed not to disconnect or charge late fees for small businesses with fewer than 50 employees as well as consumer customers.

For its own 42,500 employees, CenturyLink implemented an emergency paid time off program and extended short-term disability coverage to all U.S. employees to allow those directly touched by the virus. While the telecom was initially challenged to meet the recommendations for personal protective equipment for its essential employees, CenturyLink said that has now been resolved and that the protection of its employees remains a top concern. To that end, CenturyLink in early March sent 75 percent of its employees to work from home.

"Frankly, I doubt we ever go back to the way things were before. As a manager, I was hesitant about embracing a distributed workforce, but the performance of our employees over the past two months has demonstrated that we can remain highly effective when working digitally from home," Storey said.

How The Network Is Holding Up

Compared to typical traffic levels before the pandemic hit, CenturyLink has seen a 30-40 percent growth in internet backbone traffic and a correspondingly significant increase in average usage across its voice and conferencing platforms. The telecom said that daily growth in traffic has leveled off over the last few weeks, but usage remains high. Storey warned that not all of that growth has translated to revenue, however.

Customers also began rapidly increasing capacity, deploying more VPN capabilities, and adding security services to improve the connectivity required to work and learn from home, Storey said.

"The good news here is that the CenturyLink network was purpose built as a platform of capabilities to handle the growing consumption of bandwidth that is brought about by digital transformation and the fourth industrial revolution," he said. "Our network is built to flex in response to in-the-moment traffic increases. But, when those increases begin to reach beyond the limits of our ability to flex, the robustness of our technology and the scope of our fiber and conduit infrastructure allows us to quickly and economically augment to handle the ever-increasing demand."

Small Business Customer Concern

COVID-19 will affect every aspect of CenturyLink's business, according to Storey. "I’m especially concerned about financial health of our smallest business customers. These businesses form such a critical part of our local communities, and they may lack the resources to weather disruptions of this magnitude," he told investors.

CenturyLink said that while the telecom will be watching this segment closely, it isn't seeing an increase in churn yet. Storey said CenturyLink will continue to invest in fiber and providing higher speeds to take share in this market, but given the rising unemployment numbers, this segment -- along with CenturyLink's consumer segment -- will most likely feel the pain of the pandemic the most.

"Our far-reaching and powerful fiber network together with services like embedded security, edge computing, IP enablement and managed services make us a key-enabler of digital transformation across our economy," Storey said. "This crisis has reinforced the value of those services to our customers, and our response has highlighted our ability to meet their evolving needs quickly and effectively."

Business Services Results

On a year-over-year basis, SMB revenue continued its decline, falling 6 percent, primarily driven by continued declines in legacy voice services, said CenturyLink's CFO Neel Dev, who called SMB "an area of concern." International and Global Accounts or revenue was roughly flat, as was the telecom's Enterprise segment, which decreased 0.4 percent year-over-year.

CenturyLink expects International and Enterprise revenues to be impacted by the cancellation of live events and customers putting off major network buying decisions. however, Dev said that the funnel remains strong.

"Several of our customers are evaluating accelerating their own digital transformation, which we expect to be a benefit over the long-term," he said.

Wholesale revenue decreased 7 percent year-over-year compared to a decline of 6.1 percent in 2019's first quarter.

"We expect customers in this segment will continue to optimize spending with other vendors in this environment, which may put pressure on revenue in the coming quarters. Additionally, as many of their enterprise customers defer buying decisions, we would expect to see the second quarter impact," Dev said.

Overall Revenue Results

As CenturyLink saw declines across SMB, Wholesale and its Consumer segment, revenues for the first quarter of 2020, which ended March 31, declined 3.7 percent to $5.23 billion, compared to $5.43 billion in the first quarter of 2019. Diluted earnings per share for the first quarter was up to 37 cents compared to 34 cents per share for the first quarter in 2019. Net income for the quarter was $316 million compared to $6.16 billion a year ago.

Just as AT&T and Verizon did, CenturyLink withdrew its full-year 2020 financial outlook for adjusted EBITDA, free cash flow and capital expenditures, citing that impact of the coronavirus and the resulting economic circumstances that will be hard to predict.

"While we’re still in the early days, and there are a lot of unknowns, one thing I feel certain is that the demand for fiber and for the services we provide are more important than ever," Storey said at the end of the earnings call. "CenturyLink will also rise to the challenge to meet customer needs."