CenturyLink (NYSE:CTL) has introduced Savvis ClientConnect, a gateway for companies to generate sales avenues by linking with other organizations in its data centers. The product is designed to fuel data center inter-connectivity and ecosystem growth. In this article, I want to show how the trend in data center inter-connectivity will boost the revenue of CenturyLink's new product. I particularly want to look at how the growing data center traffic will make CenturyLink improve price multiples and generate more revenue with its new product.
Why will CenturyLink achieve sales growth? In the past few years, the IT sector has witnessed data center traffic evolving from an emerging trend to a tradition that is gaining global popularity. According to Cisco's (NASDAQ:CSCO) Global Cloud Index, global data center IP traffic will nearly quadruple within the next five years. Overall traffic will expand at an annual growth of 31% from 2011 to 2016. Increased data center traffic drives inter-connectivity. In other words, the growing trend of data center inter-connectivity will make numerous organizations patronize Savvis ClientConnect in the next few years. This factor will increase CenturyLink's revenue.
Data hosting and inter-connectivity through Savvis, a CenturyLink company, has already improved revenue. Savvis's fourth quarter activities generated operating revenues of $292 million, a 12.7% increase from the same period in 2011. This improved CenturyLink's 2012 year-over-year revenue trend to a 1.5% rate of decline, compared with a 3.2% decline in the same period in 2011. The company's net income was $415 million, compared with $343 million in 2011. Full-year 2012 net income was $947 million, compared with $867 million in 2011.
"We realized solid strategic data and hosting revenue growth during 2012 driven by strong demand from our business customers for high bandwidth data services, collocation, and managed services, including cloud. The December commercial launch of our new Savvisdirect product, which meets the increasing demand for a simplified approach to cloud computing, reflects the combined strength of our strategic asset portfolio and employee innovation," said Glen Post, CenturyLink's CEO.
In the third quarter of 2012, Savvis generated an operating revenue of $280 million for CenturyLink, an 8.1% increase from 2011. The company achieved operating revenues of $4.57 billion, improving year-over-year rate of revenue decline to 1.3%, compared with 4.6% in the same quarter in 2011.
"CenturyLink's third quarter results reflect our continued progress toward top-line revenue stabilization, successful integration of the Qwest and Savvis operations, and alignment of our operating costs with our revenue and growth opportunities," said Post.
Data Center Interconnectivity Initiatives
In the past few months, CenturyLink has undertaken a number of data center inter-connectivity initiatives. It unveiled hosting services for China, and launched a data center in Frankfurt, Germany. It expanded the London Data Center Footprint due to European demand. It delivered subscription-based hosting services for SAP (NYSE:SAP) HANA and bolstered its enterprise cloud ecosystem program through the VMware (NYSE:VMW) Cloud Applications Marketplace.
The just-introduced Savvis ClientConnect provides customers with the opportunity for locating others that subscribe to the facility. Clients can promote their products to companies through the Savvis data center. "Whether you're a retailer looking for e-commerce services, or a trading firm looking for low-latency access to financial exchanges, Savvis ClientConnect gives you the visibility into players that accelerate your business growth," said Drew Leonard, Savvis vice president for Collocation Product Management. "Clients that opt into this service can save time and money connecting with a variety of diverse businesses and carriers found within our global data center network."
Data center inter-connectivity is important to CenturyLink. Fortunately, the trend is evolving from an emerging practice to an established networking solution. Now is the time for CenturyLink to use it to gain advantage over its rivals.
Relating Savvis's contribution to CenturyLink's financial reports, we saw growth year-over-year. It is clear CenturyLink has improved in comparison with 2011, so it can be said that the company's price multiples are becoming more attractive.
Compared with its rivals, how is CenturyLink performing? With an EPS of 1.25, compared with -0.09 for Amazon (NASDAQ:AMZN) and 1.23 for EMC (EMC), gross margin of 58.39%, compared with 24.13% for Amazon and 61.21% for EMC, and price to sales of 1.28, compared with 2.04 for Amazon and 2.19 for EMC, CenturyLink is doing as well as its rivals. Amazon's Web Services will compete with ClientConnect. It has data centers in the East and West of the U.S.; in Dublin, Ireland; Tokyo, Japan; and Singapore. But ClientConnect is unique because it can accelerate business growth by giving clients visibility to important players on the network. EMC has partners providing product lines such as BlueLock in Indianapolis, and Terremark in Miami. However, ClientConnect has a greater reach, enabling CenturyLink to generate more revenue.
Looking at the past performance of the inter-connectivity products and the growth prospects of the data center market in the next few years, we can say that Savvis ClientConnect will improve CenturyLink's price multiples. Analyzing the company's numbers in relation to those of its rivals, we can say CenturyLink is a good buy at the moment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.