Can CenturyLink Transform Into A Technology Company Generating Revenue Opportunities?
Summary
- Digital transformation continues marching on producing double-digit CAGR for data, increasing demand for cybersecurity.
- Edge computing will be critical in a world of ever-growing IoT and the rollout of 5G.
- CenturyLink has the tools to transformation from a telecom company to a technology company.
The focus of this article is how CenturyLink (CTL) may transform into a technology company.
Data has been increasing at double-digit CAGR for many years and will continue unabated for the foreseeable future according to "The Cisco VNI forecast"; however, there has been little benefit to revenue growth which brings us to CenturyLink. The telecom model of past is not the road to the future. Jeff Storey - CEO - made these comments on the last conference call:
we've initiated the fundamental transformation of CenturyLink from a telecom company to a technology company. … Telecom companies sell circuits; technology companies interface our capabilities directly within the applications of our customers
We've moved quickly away from non-core less profitable products, and customer contracts, and instead focused more on product development particularly around cloud, security, hybrid networking, and edge computing for our enterprise customers.
Next on the horizon is edge computing. Again, our fiber assets are key and we are investing to couple those assets with our widely distributed central offices, data centers, and the other points of presence we operate to distribute computing resources at the very edge of the network.
If you think about edge computing, we think we can get our customers computing resources very, very close to the edge of the network from a latency perspective by utilizing all of our facilities. So we'll look at the products and services and figure out continue to work on how do we integrate those services into our customers businesses. I mentioned that we're a technology company not a telecom company.
Moving quickly away from non-core less profitable products hurts the top line in the short term until the more profitable services gain traction to replace lost revenue. I noted in my last article, revenue visibility consisted of three pillars:
- Unprofitable revenue that CenturyLink plans to exit
- Legacy revenue declines
- Growth in profitable revenue
One and two are driving revenue declines and will continue for the foreseeable future. That brings us to number three, the black box, i.e. no visibility provided. What are the catalysts that will produce this growing profitable revenue? Management gave us the outline in the conference call comments above. They are services built around cloud, security, hybrid networking, and edge computing.
The technology transformation, in part, consists of CenturyLink's ability to interface their capabilities directly within the customers applications. We'll look at edge computing, security, and hybrid networking items management has called our attention too.
Edge Computing
Edge computing brings data processing power closer to the source/customer greatly reducing latency. It does not replace the cloud but process data near the device that needs it quickly. Cloud processing is not as time sensitive such as big data analytics. How could CenturyLink take advantage of this? Considering the size of their network they are already close to customers. They could transform by selling services from platforms set up at the edge where processing power and low latency are critical. Processing can be divided between the edge and a public cloud such as AWS or Azure dependent on time sensitivity. They already work with AWS and Azure providing a secure, private, direct connections so it's not a big leap to set up platforms at the edge. They are coupling their fiber assets with central offices, data centers, other points of presence to distribute computing resources at the edge of the network. (see appendix for network maps, etc.)
Think of 5G applications. If there is no edge, they lose much of the low latency advantage needed for autonomous cars, warehouses, distribution centers, factories, robotics etc. There are probably apps not yet developed once 5G infrastructure is commonplace, albeit a few years off. I call these platforms virtual clouds or mini-clouds, I know, simplistic but it's my layman's attempt at making a point. One market estimate has it at $6.7B by 2022, another at $16.7B by 2025. That said estimates are all over the map, some lower others higher, but the message is clear; revenue opportunity is large.
Security
Cyber security solutions are the ability to protect networks and all its components from major cyber threats. You've probably heard terms such as cyber terrorism, cyber warfare, and cyber espionage make the headlines from time to time.
As business and consumer digital transformation grow, so will cyber threats perpetrated not just by hacking groups but governments and government- backed groups. Given the size and scope of CenturyLink's network and ability to monitor and stop threats close to near real-time gives them an advantage in this race to attract customers.
CenturyLink is a managed security service provider and expanded its global network by acquiring Level 3 in 2017 giving the company visibility on a global scale into security threats to better predict problems and mitigate attacks.
Today, the company provides a multilayered approach through network-based security solutions that consist of advanced capabilities; services such as DDoS mitigation, adaptive network security, threat intelligence; and complementary services such as incident management and response and security log monitoring. The global network allows its extensive visibility into security threats to better predict problems and quickly mitigate attacks. CenturyLink Threat Research Labs published the following monitoring activities:
- Monitor ~1.3 billion security events per day
- Monitor over 5,000 Command and Control servers daily
- Remove ~40 Command and Control networks per month
- Respond to and mitigate ~120 DDoS attacks a day
- Monitor over 114 billion NetFlow sessions per day
- Collect ~357 million DNS queries per day
- Track abnormal spikes in traffic as an indicator of threat activity
- Focus on role-based attacks that attempt to manipulate victims
A Gartner press release in October 2018 in a survey of global CIOs found that 88% plan to deploy cybersecurity technology in the next 12 months.
Market size in dollars is all over the map but this release on MarketWatch estimates $269B by 2026 although this covers a wide range of products and services. The end users include banking, financial services, insurance industry, IT & Telecom, healthcare, retail, defense and government, travel and hospitality among others. Another large revenue opportunity.
Hybrid Networking
Hybrid networking is not only the technology driven by SD-WAN but the underlying network topology that supports it, both public and private networking.
Simply put SD-WAN takes all the elements of the underlying network, public and private and ties everything together. For the technically literate here is a video on SD-WAN in CenturyLink's words. CenturyLink's has one of the most geographically dispersed network typologies on the planet (see appendix for more specifics) helping drive business's digital transformation. Combine this with security, the eventual growth of edge computing and a list of products and solutions too long to list allows Enterprise to bring everything under one roof that adapts to the changing technology environment.
The Gartner press release (linked above) breaks down IT spending and growth by segment. Enterprise software and IT services are expected to add about $81B in 2019. David Cappuccio (Gartner VP) noted:
IT infrastructure is evolving from on-premises applications to a blend of workloads sourced both internally and externally. The concept of global infrastructure delivery is a design model that enables I&O leaders to plan the best combinations of attributes to ensure flexible and effective infrastructure delivery, wherever the resource is needed. By selecting the right partners, enterprises can create infrastructures that can adapt quickly to new delivery models (e.g., cross connects to exchange hubs) and that can implement application-specific cloud services quickly while minimizing network complexity.
You could also substitute "cloud services" with "edge services". Creating infrastructures that can adapt quickly, minimize network complexity and most important, reduce costs for their Enterprise customers/partners is where they want to be. The opportunity is there, especially for those with a large fiber footprint.
Summary
Given the global reach and size of the network, they are well positioned to leverage edge computing. None of this will happen overnight. 5G deployment will probably not move the needle for a year or two but once deployed on a massive scale more technology requiring low latency will ensue. Edge computing and security are major opportunities for growth.
Combining the edge with security along with delivering everything from large Dark Fiber deals for content companies, adaptive networking for multinational enterprises utilizing a hybrid cloud architecture down to SD-WAN or high-speed IT for small and medium businesses along with other capabilities and we may start to see a transformation from a telecom company to a technology company. This also reflects why 75% revenue is from the business segment vs. consumer, as is their focus. Expect this trend to continue.
The question is will they succeed. They certainly have the tools (think global network assets) in their toolbox. A bigger question is do they have the capital; something that probably played a part in the dividend decision not to mention debt. Today I'm leaning toward success because they have the capital to invest tied to a healthy free cash flow outlook.
I get why the stock has been pummeled lately, a dividend cut and how it was handled, lawsuits, high debt load, and revenue declines. The transformation outlined in this article will take a few quarters to play out. That said using the market as a voting machine Mr. Market appears to be pricing the stock with odds leaning more toward transformation failure vs. success although management isn't helping the situation by not providing any aspect of revenue visibility.
Appendix
I've mentioned the size and scale of the CenturyLink global network. Below are links to visuals and a summary that clarify the words "size and scale".
Network Cities and Points of Presence
At December 31, 2018 (source 10-K):
- Approximately 450,000 route miles of fiber optic plant;
- Approximately 910,000 miles of copper plant;
- More than 360 colocation facilities and data centers globally;
- Approximately 37,500 route miles of subsea fiber optic cable systems;
- More than 150,000 Fiber On-net buildings;
- Multiple gateway and transmission facilities used in connection with operating our network throughout North America, Europe, and Latin America; and
- Central office and other equipment that enables us to provide telephone service as an incumbent local telephone company ("ILEC") in 37 states.
This article was written by
Analyst’s Disclosure: I am/we are long CTL. 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.
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Comments (98)
I imagine the stock does nothing as long as it has a $1 divy. Maybe in 10 years it will be $14. Good luck
We are also always actively working to fully maximize the value of our asset portfolio. ...pursuing opportunities to unlock value by selling all or parts of non-core lines of business. ...we will remain active in our efforts to invest, acquire and, when it creates additional value for shareholders, divest assets that may be more valuable to others than as part of our portfolio.
Management wants permission to increase the number of authorized shares.....heck no!
I posted only because there are some interesting articles for those that are interested in that stuff.
I sold loosing. No future. Who would acquire them?
www.iiex.club/...
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The tab "Summary" at the bottom graphs all previous results resulting in the trend direction.
Organizing the Business for Digital Transformation in Manufacturing
February 2019
Questions posed by: CenturyLink Answers by: Reid Paquin, Research Director, IDC Manufacturing Insights
idcdocserv.com/...There is also a message from the sponsor after the Q&A that give some stats.
- Achieved the originally projected annualized run-rate Adjusted EBITDA synergies of $850 million related to the acquisition of Level 3 as of the end of 2018, two years earlier than anticipated
- Announced additional annualized run-rate savings of $800 million to $1.0 billion of synergies and transformation initiatives projected to be realized over the next three years
Agree that debt needs to be cut. When the announced in prior CC that dividends were safe and would not be cut then to cut in the following quarter.
Creditability may be lacking. The only thing CTL has given is tax losses.