Why CenturyLink Will Win With Data Center Solution

| About: CenturyLink, Inc. (CTL)
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CenturyLink (NYSE:CTL) recently announced that customers using its Jacksonville data centers can now utilize its fiber optic network for back-up service connections. The customers can also gain access to CenturyLink's data solution portfolio. In this article, I want to show how rising global data center traffic will increase use of versatile data centers and enable CenturyLink to make good revenues with the Jacksonville project and similar ones. The development will help CenturyLink to improve its quarterly data center revenues by 15%.

Why will CenturyLink improve its revenues? In the past few years, enterprises, government agencies, and consumers are placing more of their mission-critical workloads in the cloud. This is driving data center IP traffic. According to the Cisco Global Cloud Index, annual data center IP traffic will reach 554 exabytes per month in 2016, from 146 exabytes in 2011. CenturyLink will benefit from this trend in Jacksonville and places with unified data center solutions. This will boost CenturyLink's revenues and improve the price multiples of the company.


CenturyLink will certainly experience sales growth through its data center products. They have already improved the company's revenues in the first quarter. Managed data hosting revenues were $125 million, representing a 20% increase over the same period a year ago. Net income was $475 million, compared with $423 million in the year-ago period.

"CenturyLink reported strong financial results and achieved solid broadband and Prism-TV customer growth in the first quarter, while continuing to see good demand from businesses for high-bandwidth network and data hosting services," said Glen Post, chief executive officer.

In the fourth quarter, managed data hosting revenues were $120 million, representing a 21.2% increase over the same period a year ago. Net income for full-year 2012 was $777 million, compared with $373 million for full-year 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," said Post.

CenturyLink's Data Center Services

CenturyLink has developed numerous data center solutions to drive revenue improvement. The company's IQ Internet Port provides scalable internet connectivity to meet any corporate requirement. Its IQ Networking Port and VPN Service allow voice and data applications on one platform. Its Optical Wavelength Service allows point-to-point service through dense wave division multiplexing (DWDM) technology.

The Jacksonville project will help businesses to benefit from the power of managed data hosting. "CenturyLink's data networking products, combined with reliable connectivity to our nationwide and international network and secure access into data centers, will help businesses in Jacksonville develop and launch cloud-based offerings needed in today's fast-paced business environment," said Richard Twilley, CenturyLink vice president of sales.

CenturyLink needs the Jacksonville and similar projects to address the growing demand for greater network security. Fortunately, its data hosting division is driving overall growth. This is important to the company if it wants to compete with rivals.

Looking at the company's recent reports, we notice that the data hosting division shows improvement year-on-year. It is an indication that CenturyLink's revenues have been improved by data center solutions compared with the prior year. Based on this, it can be said the company is operating its data center division efficiently.

With a price to sales ratio of 1.26, CenturyLink is trading cheaply given its impressive gross margin of 58.39%. The Jacksonville data center initiative and others will further improve the company's already commendable net income, reduce its debt of $20.79 billion, and establish a benchmark for performance.


With a price to earnings ratio of 26.69, compared with 28.86 for AT&T (NYSE:T) and 133.55 for Verizon (NYSE:VZ), and gross margin of 58.39%, compared to 59.96% for AT&T and 62.84% for Verizon, CenturyLink is on par with competitors. Verizon recently began deploying innovative data center solutions for businesses like Quest Diagnostics and others. CenturyLink's new initiative enables the company to continue being competitive with Verizon. AT&T also recently expanded its strategic relationship with Microsoft to deliver data center and other solutions. CenturyLink's data center solutions will enable the company to provide competition.


Based on the performance of the company's data hosting segment and the growth prospects in the sector, we can say the Jacksonville project and similar ones will improve revenues for CenturyLink. Looking at the price multiples in relation to AT&T and Verizon, we still say CenturyLink is a buy for now.

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.