CenturyLink (NYSE:CTL) has acquired AppFog to strengthen its subsidiary Savvis. The acquisition will enhance the Savvis Platform-as-a-Service and the data hosting solutions. In this article, I want to show how the rise in the Platform-as-a-Service market will enable CenturyLink to increase its data hosting segment revenues by 5%. The development will help CenturyLink to improve its price multiples.
How will CenturyLink's fundamentals show an improvement? Many organizations seek for a Platform-as-a-Service solution to optimize their operations. According to the respected research firm, Gartner, the Platform-as-a-Service sector accounted for $512 million in 2010, and is set to reach $1.7 billion by 2015. AppFog will benefit from the trend as a leading provider of the solution in the market. This will boost CenturyLink's data hosting segment and improve its price multiples.
CenturyLink's sales growth is inevitable. Its Savvis subsidiary has a history of boosting the company's data hosting segment revenues. In the first quarter, the operational revenues of the segment were $334 million, a 7.7% increase from the first quarter in 2012. The managed hosting revenues were $125 million, a 20% increase over the same period a year ago.
In the fourth quarter, the CenturyLink data hosting segment recorded an operating revenue of $292 million, a 12.7% increase from the fourth quarter of 2011. The managed hosting revenues were $120 million, representing a 21.2% increase on a year-on-year basis.
CenturyLink and Data Hosting Segment
CenturyLink has strengthened its data hosting segment through a number of measures. Recently, it expanded the availability of its Cloud Application Database to Asia for a secure recovery network. It introduced the Savvis ClientConnect platform to enable its customers generate the revenue opportunities from an easy contact with the other organizations on the network. It launched the Savvisdirect to expand Savvis cloud services to its partners.
The new CenturyLink acquisition will enable the company to benefit from a Platform-as-a-Service and a data hosting solution used by more than 100,000 developers. The acquired company will provide a dedicated deployment to CenturyLink's enterprise clients. President of CenturyLink's Savvis organization, Jeff Von Deylen, said:
Combining AppFog's market-leading Platform-as-a-Service cloud services and CenturyLink's global network will enable developers to securely and reliably operate and connect the applications they build and deploy.
CenturyLink needs to acquire AppFog to expand its service to its enterprise customers. Fortunately, the Platform-as-a-Service sector is experiencing a market growth. This is important to CenturyLink, as it strives to gain an advantage over its competitors.
When we look at the data hosting segment of CenturyLink, we notice that it shows an impressive year-on-year improvement. It is clear that CenturyLink's revenues have been improved by the sector compared with the previous year. So it can be said that the company is making progress.
With a price to earnings of 25.58, CenturyLink is trading competitively, especially given that it has an impressive gross margin of 60.20%. The new acquisition will improve CenturyLink's managed hosting division, improve the revenues of the data hosting segment, and improve the company's overall revenues.
How is CenturyLink performing in relation to its competitors? With an EPS of 1.41, compared with 0.40 for Verizon (NYSE:VZ), 1.29 for AT&T (NYSE:T), and 0.27 for Windstream (NASDAQ:WIN), and a price to sales of 1.20, compared with 1.52 for AT&T, 1.24 for Verizon, and 1.22 for Windstream, CenturyLink does appear to be competitive. Verizon, AT&T, and Windstream are the rivals of CenturyLink because they have the competing solutions. The AppFog acquisition will enable CenturyLink to cope with their challenge.
There is a risk in buying a CenturyLink share. The company reported a first quarter net sale of $4.51 billion, down from $4.6 billion for the same quarter in the year prior. However, based on the quality of the new acquisition and the prospects in the Platform-as-a-Service sector, we can say the AppFog acquisition will improve CenturyLink's data hosting segment revenues. Based on its price multiples, we still say CenturyLink is a good buy for the long term.
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.