On Dec 11, we issued an updated research report on leading wireline service provider CenturyLink Inc. CTL.
CenturyLink reported strong results in third-quarter 2015, wherein both the top and the bottom line outpaced the Zacks Consensus Estimate. The quarterly performance was buoyed by higher revenues from the acceptance and recognition of CAF phase II funds in the quarter.
CenturyLink’s reshuffled operating segments should help the company gain traction and boost revenues through inorganic initiatives and operating efficiency. Further, we believe strength in high-speed Internet, high bandwidth data services, Prism TV, and managed hosting and cloud services are key growth drivers.
Moreover, CenturyLink is vigorously investing in fiber-to-the-tower (FTTT) expansion. The company expects its Managed Office and Managed Enterprise Solutions to continue gaining traction and drive revenue growth on the back of increasing demand from small and large business customers. Further, the company’s broadband expansion goal will help it gain from the growing demand.
Recently, CenturyLink signed a long-term interconnection deal with Cogent Communications Holdings, Inc. CCOI. The bilateral pact for the service providers’ public IP networks will allow a stable and mutually cost-effective exchange of Internet traffic to cater to the rising use of the Internet.
The deal should thereby improve the efficiency of traffic exchanged between their networks. The financial details of the deal have been, however, kept under wraps. Meanwhile, by procuring additional capacity and new interconnection locations, CenturyLink will be able to enhance quality and provide reliable service to its customers.
Notably, in August, CenturyLink accepted $3 billion in FCC Connect America Fund II (CAFII) subsidy, for a period of six years, to provide rural broadband service to 1.2 million households and businesses across 33 states. Management aims to cover 40% of the total targeted customers by the end of 2017 and achieve 100% coverage by end 2020. At this juncture, we believe deployment of high-speed Internet services in the underserved rural areas, by making optimal use of government subsidy, may help the company strengthen its financial position.
Meanwhile, in 2015, CenturyLink expects to enhance its infrastructure to meet the growing need of its wholesale customers for cloud hosting and colocation services. Further, the company’s strong network capabilities, integrated hosting and network solutions will promote growth in the cloud business.
However, CenturyLink’s core local phone business has slowed significantly, which is evident from the consistent decline in access lines on an organic basis primarily owing to wireless substitution. Notably, as of Sep 30, 2015, total access line count stood at 11.915 million, down 5% year over year.
Further, federal regulations, labor issues and the constant need to upgrade technology are some of the potent risks prevailing.
CenturyLink presently carries a Zacks Rank #3 (Hold). Better-ranked stocks in this sector include AT&T, Inc. T and United States Cellular Corporation USM. Both the stocks carry a Zacks Rank #2 (Buy).
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