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Even CenturyLink Wants In on the Cloud

By Nicholas Rossolillo – Oct 19, 2018 at 4:18AM

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An old dog is learning some new tricks.

Communications company CenturyLink (LUMN 5.39%) recently announced a new service as part of its Cloud Connect segment for businesses: Dynamic Connections. CenturyLink stock has been in a downward slide for years, but its internet service business -- particularly that for enterprise connections -- has been the sole area of strength that's giving investors hope. With more changes to the internet's structure looming, the cloud and other business services could be the key to CenturyLink returning to growth one day.

A cloud primer

The cloud refers to software and services that a user can access via the internet. In contrast with old software that is downloaded direct to a user's computer, the software or service provider maintains the service and does all the computing power on their own server and delivers it on-demand to the subscriber.

What is Cloud Connect Dynamic Connections?

Many businesses are migrating their operations from on-premise (like software downloaded to computers or locally on company-owned servers) to the cloud. As a result, large organizations have an increasingly complicated mix of technology -- old and new. Connecting all of those different servers and computer networks with new cloud services can be a serious challenge, not to mention a potential security issue.

That's where CenturyLink's Cloud Connect division comes in. Cloud Connect was designed to help a sprawling enterprise more efficiently connect its own network with the cloud services it is using via a private internet connection. The new Dynamic Connections feature allows users of Cloud Connect to actively manage those connections to improve overall efficiency of their diverse network of computers and devices, owned servers, and various cloud services.

If this sounds like internet throttling and the net neutrality debate, that's because it's similar. However, instead of CenturyLink and other internet service providers deciding who gets preferential treatment on the internet, it's a matter of giving an organization with global reach or huge online operations control over where their own internet bandwidth is used within the company.

An artist's depiction of data being shared on the internet around the world. There are lines and numbers and charts and graphs and globes.

Image source: Getty Images.

Why this matters

CenturyLink has been under pressure for years. Its voice services are shrinking as the world goes mobile, internet streaming TV is quickly replacing cable packages, and even broadband internet connections at homes will soon get a run for their money with the advent of 5G internet from mobile companies like Verizon (NYSE: VZ). When backing out the results from the Level 3 Communications acquisition in late 2017, CenturyLink revenue declined 1.7% and 2.3% in the first and second quarters of 2018, respectively.

The IP and data services and IT and managed services segments have been bright spots through the first half of the year. Both are up by low- to mid-single digits compared to 2017, helping partially offset a 10% and 8% drop in the voice segment during the first and second quarter. Cloud Connect, the new Dynamic Connections, and other related internet and data-driven services feed into that area of growth for CenturyLink and are far more profitable than the declining legacy segments like voice.

The company's ability to roll out flexible internet and connection management options are important if those segments are to keep growing -- especially given the complex needs of organizations as the cloud continues to develop. It's also a good reason to consider adding the beleaguered CenturyLink stock to portfolios as the company's profit margins and free cash flow rebound and keep its current 10.5% dividend yield propped up. The name may conjure up images of an old and outdated communications service provider, but CenturyLink is proving it still has a place at the high-tech table.

Nicholas Rossolillo and his clients own shares of Verizon Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.

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