Savvis, a CenturyLink (CTL) subsidiary, recently announced that it had opened a data center in Frankfurt, Germany. This marks the expansion of CenturyLink into Germany through Savvis, which provides cloud infrastructure and IT solutions for various corporations. Savvis is currently operating over 50 data centers around the world, with more than 2 million square feet of floor space throughout North America, Europe, and Asia. By opening said data center in Germany, Savvis will offer its customers market access to a large number of telecom operators all around the world, as well as the trading systems of the local stock exchange. It opened its Germany headquarters in May to capitalize on growing opportunities to deliver managed hosting and cloud services to enterprises; the new data center opening seems to be a continuation of that initial expansion.
CenturyLink is a prime example of companies that grow through acquisitions and takeovers. Because it was not operationally as diversified as other telecommunications companies like Verizon (VZ) and AT&T (T), it has expanded its presence through acquisitions. Moreover, CenturyLink has suffered as the market for traditional fixed line phones has declined, largely due to the rising mobile and smartphone market, as it doesn't offer wireless communication services to compete with its bigger rivals. In 2009, CTL completed the acquisition of Embarq Corp, which mainly provided landline telephone services along with high speed internet and satellite TV, while in 2011, the company finalized two transactions acquiring Qwest as well as Savvis. Despite the falling landline phone market, these acquisitions have helped CTL in improving its revenue at a staggering rate. In the financial year ended 2011, the company reported total revenue of approximately $14.5 billion, which is a 2007-2011 CAGR of 56%. Not only have these acquisitions helped the company boost its revenue over the years, they have also given it access to growth opportunities both locally and internationally; the recent entry into the European market through Savvis, a cloud infrastructure and IT solutions company, is a perfect example. Before acquiring Savvis, CTL was not involved in the cloud computing business, but now, as mentioned previously, it is operating around 50 data centers all around the world, catering to the needs of global enterprises, which is a potential growth opportunity.
Data centers have traditionally been used to house computer systems and other components. However, they have evolved over time to operate and manage a telecom operator's network and provide data center-based and hosted applications directly to the operator's customers. This bodes very well for companies like CTL, who have a stake in data center businesses, as many telecommunication companies around the world are outsourcing their IT functions to these data centers to cut their costs, as well as to compete with their rivals.
As mentioned previously, the company has had a staggering growth in revenues, largely due to its acquisitions, but that growth hasn't quite trickled down to its bottom line, which, even though in positive territory, is under pressure because of various acquisition-related costs. However, the company continues to do well in terms of post-acquisition integration. According to the latest filings, the company achieved synergies of over $350 million from its Qwest acquisition, and is on track to achieve its annual synergy targets.
The stock offers an attractive dividend yield of 7.1%, much higher than AT&T's 4.6% and Verizon's 4.5%. Moreover, the 7.1% dividend yield also compares well to its operating cash flow yield of 16%, indicating CTL's ability to finance dividends through its cash flows. CTL is trading at 16 times its forward earnings, which is at par with Verizon's forward earnings multiple. The stock is up almost 10% since the start of the year, and we believe it has a further upside potential based on the growth opportunities in cloud computing and network services.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.