CenturyLink: New Services And Effort To Expand In New Markets Justify Bullish Stance

Jul. 4.14 | About: CenturyLink, Inc. (CTL)


Company is looking to deliver healthy financial performance in long term.

CTL is investing to grow in new markets and improve services in existing markets.

Growth in broadband subscriber base and expansion of Prism TV portends well for company’s future operations.

I reiterate my bullish stance on CenturyLink (NYSE:CTL). The company is on track to growing in the highly saturated U.S. telecom sector with its continuous investments in growth-generating initiatives. Over the past few quarters, the company's efforts to grow in existing markets, while looking to establish its footprints in new markets, has been supporting its revenue growth. Moreover, the company's focused efforts on Prism TV expansion, broadband service enhancement, and managed efforts in cloud services will further uplift its subscriber base and drive the company's long term profit growth. In addition, the company has been steadily growing its cash flow base to keep investors satisfied with aggressive share buybacks and consistent dividends; CTL currently offers a dividend yield of 5.9%.

CTL is one of the leading rural exchange carriers (RLECs). The company has been growing its business at a decent pace by offering local phone services, long distance internet access, fiber optic network services and data hosting services.

Prism TV and Broadband remain the crowd pleaser

For the past few quarters, CTL has been putting in efforts to increase its subscriber base by steadily expanding its Prism TV and broadband services. CTL has been gradually uplifting its subscriber base with Prism TV expansion and the acquisition of Qwest. The company's Prism TV service now covers 2 million homes. Also, the company has 200,000 Prism TV customers, which it plans to increase to 300,000 by the end of 2014. Moreover, the company added 24,000 Prism TV customers during 1Q14. In the near future, as the company remains committed to finding new markets to expand its Prism TV services, it will be able to add more customers.

Moreover, Prism TV has also done well for the company's broadband services by driving more customers to purchase its broadband products. CTL is well placed among its peers with a promising broadband subscriber base. In 1Q14, CTL showed a healthy broadband subscribers growth of 2.4% year-over-year, by adding approximately 66,000 high-speed internet customers. Windstream (NASDAQ:WIN)'s broadband subscriber base dropped by 2.9% year-on-year. Moreover, the company's managed efforts to increase Prism TV presence in more markets coupled with the broadband services successfully grew its recent quarter's strategic revenue by 1% year-over-year. I believe that as CTL sticks to the idea of investing in high speed internet services to deploy the fiber deep in the network, the company's broadband subscriber base will continue to grow.

However, there has been speculation about possible threats to the company's Prism TV rollout from the AT&T (NYSE:T) and Direct TV (DTV) merger. I believe this merger will not change CTL's Prism TV rollout plans, as Prism TV will be covering densely-populated urban areas, where the cost to get high bandwidth services is less expensive. AT&T, on the other hand, will cover rural markets for broadband services, where still two-thirds of CTL's customers can get access to 10 megahertz or higher.

Customers in these competitive markets, where AT&T may establish its significant footprint with the deal, are highly likely to remain committed to CTL. The company's chief financial officer, Stewart Ewing, at the Bank of America Merrill Lynch Global Telecom and Media Conference recently said:

At this point, we don't really have any concerns about the -- because people -- on the margin some of the folks that don't use much bandwidth, probably use a wireless connection today to download. But as the bandwidth demands grow, the wireless connection becomes more and more expensive and that could tend to drive people our way. So as long as we have 10 meg or better to the customers, we don't really think there is that much exposure."

Data Hosting

In a highly saturated cloud market, CTL is well in line with its peers. The company's acquisition of Savvis has made it the second largest colocation service provider in the U.S. The Savvis acquisition, coupled with its improved cloud capacity, modestly increased CTL's data hosting revenue by 6% year-over-year, which was fueled by cloud revenue growth of nearly 13% year-over-year and colocation revenue growth of 3.3% year-over-year. I believe the company's recent announcement of expanding cloud services and price adjustment will attract more customers, thereby supporting the revenue growth of data hosting services. In the densely-populated cloud market, where all competitors are actively cutting down prices, CTL's price cut initiatives will attract customers, keeping it ahead of its peers.

Investors have concerns that these price cuts could in the long run strain the company's profitability, contracting margins. But CTL's management has affirmed in the recent conference call that these price cuts are well thought out, and will not run the company into any financial strain. In fact, the management said the price cuts will portend well for long-term profitability.

Shareholder Value

The company's increasing presence in several markets is supporting its cash flows. In 1Q14, CTL generated operating cash flows of $1.79 billion. The company currently has a free cash flow yield of 14%, which supports its dividend yield of 5.9%. Moreover, the company has announced to repurchase additional $1 billion shares, as the previous $2 billion share buyback plan expired in 2Q14. Although the company is pursuing growth, but with its ongoing share buyback plans and dividend yield of 5.9%, CTL remains committed to delivering wealth to its shareholders. In addition, these share buybacks will also portend well in terms of growing the company's earnings base.


The company is likely to deliver a healthy financial performance in the long term, as it has been consistently investing in growth opportunities by expanding to new markets and improving services in current markets. The growth in broadband subscriber base and the expansion of Prism TV will portend well for the company's future operations. Due to the aforementioned factors, I am bullish on the stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.