CenturyLink, Inc. (NYSE:CTL) could begin to blunt their revenue decline, driven by mid-single digit revenue growth in strategic revenues, representing 49 percent of CTL's mix.
Strategic services include Private Line, Broadband, Multiprotocol Label Switching (MPLS), Managed Hosting, Colocation, Ethernet, Video, VOIP, and Wireless (which is an agency agreement to market Verizon-branded services).
Like all of the rural local exchange carriers (RLECs), CenturyLink's strategic services initiatives are intended to offset the decline of its high-margin voice and internet services. Within its strategic products, CenturyLink is focusing on broadband, PrismTV, fiber to the tower (FTTT) and managed hosting/cloud services
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UBS analyst Batya Levi says the shift to lower-margin revenues will continue to impact overall margins. However, the company expects to stabilize margins at high-30 percent and improve on EBITDA decline by continued efforts to cut cost.
CenturyLink's segments have varied margin profiles. Wholesale and consumer have the highest margins, both at about 60 percent, enterprise is in the high 30s to low 40s, and data hosting in the 20s and falling. Further, the company has significant opex leverage as a result of ongoing integration and cost reduction efforts.
Moreover, Fiber to the Tower, Prism TV, Broadband, and Data hosting are CenturyLink's key strategic initiatives to drive revenue growth.
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Fiber to the tower (FTTT) is an initiative that most of the RLECs and ILECs (incumbent local exchange carriers) have invested in to provide fiber connectivity to the cell sites of wireless carriers. Owing to the lower revenues of FTTT relative to the legacy products being replaced, CenturyLink expects revenue compression from FTTT initiatives. This should abate by the end of 2013 and return to positive revenue growth in 2014.
Cen! turyLink's total fiber-connected towers have almost touched 20,000. Management expects FTTT projects to begin to wind down in 2014, which should reduce capex. The projects have high upfront costs, but CenturyLink generally secures a five- to seven-year contract that guarantees revenue and returns per site.
In addition, CenturyLink's Prism TV offering can help to stabilize and eventually grow consumer revenues. CenturyLink launched PrismTV in 2011 and currently offers service in a handful of legacy CenturyLink markets. PrismTV uses CenturyLink's existing fiber to the node infrastructure.
The company expects Prism to be available to 5 million households by the end of 2015. PrismTV's triple average revenue per user (ARPU) of $165-$170 is in line with ARPUs for AT&T's U-verse.
BMO Capital Markets analyst Kevin Manning expects Prism TV revenue growing from $182 million in 2012 to $250 million in 2013 and $426 million in 2014.
As Prism TV is being rolled out only in select markets, high speed broadband is CenturyLink's lead consumer offer to stabilize consumer revenues. CenturyLink is expanding its coverage of high-speed internet and increasing the throughput by running Fiber to the Node (FTTN). FTTN is available to more than 7 million homes in CenturyLink's service area.
However, there are some investor concerns over CenturyLink's data hosting business. CenturyLink acquired Savvis in 2011 for $2.5 billion. At the time, Savvis was hailed for its cloud solutions and its managed hosting business was seen as a potential source of high-margin revenue growth.
However, since the Savvis acquisition was announced, Savvis' organic revenues have been weak, growing only a modest annual growth of 3 percent, versus the industry average of 20 percent. Additionally, data hosting margins have also been downhill.
Levi noted that Savvis has been weaker than expected due to churn, but management expects the strong sales pipeline will turn it to high-single digit growth beyond the se! cond quar! ter of 2014. Cross selling efforts continue to improve, representing 30 percent of revenues in the third quarter of 2013 compared to 26 percent in the second quarter of 2013.
Meanwhile, consumer revenue decline continues to improve spurred by growth in broadband and PrismTV. While broadband adds were lumpy in 2013, management expects additions to remain positive and has not seen much of an impact from Time Warner Cable's $15 offer.
The company will continue to expand its IPTV and GPON footprint, which should further help subscriber and revenue trends. The company expects total capex to remain roughly flat at $3 billion in 2014.
The company also believes its recent Tier 3 acquisition strengthens their product offering. CenturyLink expects strategic revenues to grow at 4-6 percent with strong demand for MPLS, Ethernet and wavelength services. Wireless backhaul revenue is expected to grow in 2014.
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