A Few Reasons Why CenturyLink Should Continue Growing

CenturyLink has got off to a good start in fiscal 2014. Its strategies indicate that the good times should continue.

May 19, 2014 at 11:15PM

Telecom operator CenturyLink (NYSE:CTL) has been on a roll in 2014 and it seems that the company isn't going to stop anytime soon. The company's stock has gained almost 15% this year and could go higher if CenturyLink's recent first-quarter results are an indication. The company seems to be doing well despite competition from Frontier Communications (NASDAQ:FTR) and Windstream (NASDAQ:WIN). Let's see why CenturyLink is poised to deliver stronger gains in the face of stiff competition.

Strong demand in key areas
CenturyLink reported good first-quarter results driven by strong demand for high-bandwidth data services, high-speed Internet, and Prism TV services. The company also reported a solid improvement in the rate of decline of its legacy revenue. As a result, CenturyLink achieved core revenue of $4.11 billion in the first quarter, nearly flat from last year. This was a better performance considering a 2% year-over-year decline in the year-ago quarter, illustrating its continued progress toward revenue stability.

CenturyLink is seeing an increase in demand from business customers for its solutions that meet their network and hosting needs. The company's managed office product suite launch, along with multi-site MPLS product sales, are going strong. CenturyLink is also progressing well on the integration of its Tier 3 acquisition, adding new cloud nodes in two CenturyLink data centers in the first quarter. Going forward, it remains on track to add these nodes in four additional CenturyLink data centers by the year's end.

Tier 3's cloud infrastructure technology is expected to significantly strengthen CenturyLink's capabilities to meet the growing demand for highly automated cloud and managed services. It is also seeing good growth in Ethernet services from its fiber-to-the-tower investments and the wholesale business, which are required by wireless carriers for their data backhaul needs.

Additionally, CenturyLink has achieved year over year revenue growth for the last seven quarters in its combined business and hosting segment. Driven by continued strength in high speed Internet and Prism TV customer growth, along with price increases and improved churn, CenturyLink's consumer revenue grew sequentially once again.

Strategies that could drive growth
Looking ahead, CenturyLink is focusing on transforming itself from a provider of traditional network communications to an integrated provider of IP, enhanced network, cloud hosting and IT services. As a result, it is refining its focus and executing on several strategic priorities. These strategic priorities are its business network solutions, hosting cloud and IT services, consumer broadband and video, and operating efficiency. 

Over the last few years, CenturyLink has made significant investments in its ability to provide network and hosting services to its business customers. Now it is in a position where more than 60% of its revenue comes from business customers across its business hosting and wholesale segments. Since it now provides its business customers with a suite of network, cloud, hosting, colocation, and IT services, the growth in revenue from this segment isn't surprising. 

As mentioned earlier, CenturyLink is witnessing strong early sales from its recent launch of Managed Office, a solution that integrates network, VoIP, email, and other key business applications. Going forward, CenturyLink believes that it has a good opportunity to grow its business customer base with this service given the number of features it has packed into the solution.

In addition, the company will also be expanding its GPON and fiber deployment to commercial buildings, leading to an increase in addressable market opportunities. CenturyLink is trying to deliver fast Ethernet quality speeds to its customers, allowing them to cloud-enable their businesses. The company has got a good opportunity going forward as businesses move to the cloud. 

CenturyLink's investments in strategic products such as high speed Internet, high bandwidth data services, Prism TV, and managed hosting services are driving its growth. The company saw robust customer growth in the first quarter, adding approximately 66,000 high-speed Internet customers and 24,000 Prism TV customers. Moreover, it continues to expect more HSI customer additions in the second half of the year.

Where does the competition stand?
While it is clear that CenturyLink is moving along nicely on the back of its solutions and expansion moves, investors shouldn't ignore the potential threat that the likes of Windstream and Frontier present. CenturyLink is focusing on expanding its suite of cloud solutions going forward, but at the same time, even Windstream is also deploying data centers to support its own cloud-based services. Windstream expects to add 75,000 broadband customers this year, while CenturyLink lost 120,000 phone access lines in the previous quarter. 

On the other hand, Frontier is aggressively moving into new geographies. Its acquisition of AT&T's Connecticut operations for $2 billion in December 2013 expanded its operations by a big margin. Frontier gained 415,000 data, 900,000 voice, and 180,000 video residential connections from AT&T. This is definitely another peer that CenturyLink needs to be careful about.

The bottom line
CenturyLink has been doing well as it is focusing on new products to drive its growth. The company added a good number of customers in key businesses last quarter, mitigating the effect of the loss of phone access lines. Looking ahead, CenturyLink should continue performing well, so investors should definitely consider the company's stock for their portfolio.

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Meetu Anand has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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