NEW YORK (Reuters) - CenturyLink Inc (CTL.N) forecast a disappointing profit target for its last quarter before it is expected to buy Qwest Communications International Inc Q.N, sending its shares down more than 2 percent.
Investors also worried about CenturyLink’s prospects for the rest of 2011 especially as the telephone operator said it would increase capital spending to upgrade its network even as revenue keeps falling.
The companies, which expect to close their merger on April 1, are combining to reduce expenses as consumers continue to disconnect their home phones in favor of Internet services and cellphones.
But investors interpreted CenturyLink executive comments on a conference call with analysts as a sign that profits may get worse rather than better after the first quarter.
“It looks like the first-quarter range is the best you’re going to see for the CenturyLink core properties for the year,” D.A. Davidson analyst Donna Jaegers said, adding that pending regulatory changes that could cut call subsidies paid to CenturyLink would prove to be particularly difficult to offset.
Jaegers also said that at 12 percent, Qwest’s loss of telephone access lines in the fourth quarter seemed to show no sign of improvement.
“Investors are not happy about the fundamentals on either company and slowly realizing this is a defensive merger,” Jaegers said.
Wells Fargo analyst Jennifer Fritzsche said she is still bullish about the prospects for the combined entity, but she also noted that costs around an Internet television service CenturyLink is developing remain a concern.
CenturyLink forecast first-quarter earnings per share of 66 cents to 70 cents. This was below Fritzsche’s expectation for 86 cents per share and other analysts’ estimates for 82 cents.
Its first-quarter revenue target of $1.68 billion to $1.7 billion was in line with the analysts’ estimates of $1.69 billion, according to Thomson Reuters I/B/E/S.
The company said it expects its revenue to fall at a slower pace in 2011, compared with its 2010 decline.
But its target for a 2011 revenue decline in a range of 4 percent to 5 percent, compared with its 6.5 percent revenue fall in 2010, was against a backdrop of plans to increase spending this year.
CenturyLink said capital spending would rise 16 percent in 2011 to $1 billion as it plans to lay fiber to serve customers connecting wireless broadcast towers. The budget excludes any costs for integrating Qwest, CenturyLink said.
CenturyLink posted a fourth-quarter profit of $232.3 million, or 76 cents per share, down from $286.7 million, or 95 cents per share in the year-ago quarter.
Its revenue fell to $1.72 billion from $1.84 billion in the year-ago quarter, but just topped the average analyst expectation for $1.71 billion, according to Thomson Reuters I/B/E/S.
Earlier on Tuesday, Qwest said it swung to a quarterly loss of $161 million, or 9 cents per share, as it shouldered hefty charges ahead of the merger. This compared with a year-earlier profit of $108 million, or 6 cents per share. Qwest’s revenue fell 3.2 percent.
Qwest said it expects to gain regulatory approval for the CenturyLink deal from four remaining U.S. states and the Federal Communications Commission this quarter.
CenturyLink also said on Tuesday that it entered a wireless resale agreement with the biggest U.S. mobile service, Verizon Wireless, which is already Qwest’s wireless partner.
The fact that both entities now have deals with the same operator will help make integration of their offerings run smoothly, Fritzsche said.
CenturyLink shares fell 2.4 percent, or $1.10, to $44.05, in afternoon trading and Qwest shares were down 2.2 percent, or 17 cents, at $7.25, both on the New York Stock Exchange.
Reporting by Sinead Carew; editing by Gunna Dickson and Maureen Bavdek