& cplSiteName &

CenturyLink's Capex Axe to Fall on Infinera, Ciena – Analyst

Iain Morris
2/9/2017

CenturyLink's latest set of earnings is out, and it makes grim reading for some of the company's suppliers.

That's because the US telco, which is heavily focused on the enterprise segment, plans to reduce its capital expenditure by about 12% this year -- reducing the figure to $2.6 billion in 2017.

CenturyLink's capex rose 3% in 2016, to $2.958 billion, but will fall this year to reflect "the typical spending pause that is common for carriers ahead of consolidation," said Simon Leopold, an analyst at Raymond James, in a research note.

The operator, of course, is buying rival Level 3 Communications Inc. (NYSE: LVLT) in a cash-and-stock deal worth about $34 billion and first announced in October. (See CenturyLink Splashes $34B on Level 3 Buy.)

Management figures have said the capex reduction is not at all related to the annual synergies of about $125 million it expects to realize through the Level 3 merger, and that a pause will give CenturyLink Inc. (NYSE: CTL) an opportunity to review spending priorities ahead of the transaction.

As for Level 3, which has also reported results today, it plans to maintain capital expenditure at 16% of company revenues in 2017, having generated $8.2 billion in revenues last year.

Level 3 has not provided sales guidance for 2017 but aims to grow adjusted EBITDA to between $2.94 billion and $3 billion from $2.85 billion last year. Its 2016 sales were about 0.7% lower than in 2015.

So where is the CenturyLink axe set to fall?

Well, according to CEO Glen Post (that's Glen F. Post III, to give him his full honors), it's relatively good news for broadband vendors and bad for the data-center specialists.

"Our broadband investments for 2017 are expected to actually be a little higher than 2016 levels," said Post, according to a Seeking Alpha transcript of the company's earnings call. "On the other hand, with the colocation sale and pivot to partnered and multi-cloud solutions, we expect to spend less in those businesses than we have averaged over the last several years."

Back in November, CenturyLink announced plans to sell its data center and colocation businesses to a group of investors for about $2.15 billion, and so the spending reduction in this area is not altogether surprising. (See CenturyLink Sells Data Centers for $2.15B.)

Even so, Leopold says the update will not be welcomed by optical equipment vendors such as Level 3 Communications Inc. (NYSE: LVLT) and Ciena Corp. (NYSE: CIEN). At the same time, it could gee up broadband specialists like Adtran Inc. (Nasdaq: ADTN) and Calix Inc. (NYSE: CALX).

"We believe that the risk of reduced spending is greatest for vendors with exposure to both carriers [CenturyLink and Level 3], primarily Infinera," says Leopold, estimating that CenturyLink and Level 3 were together responsible for nearly a third of Infinera's sales in the 2015 fiscal year.

While Ciena appears less exposed, Leopold thinks it may also be at risk. Management statements about broadband, by contrast, should buoy sentiment about Adtran and Calix, he reckons.

Indeed, while there is plenty of doom and gloom about the broader outlook (and especially in the mobile broadband sector), several analysts reckon the fixed-line ultra-broadband market could be a bright spot this year, as operators upgrade networks to cope with data-traffic growth. (See Capex Shifting to Fixed From Wireless in 2017: MKM.)


For more fixed broadband market coverage and insights, check out our dedicated Broadband content channel here on Light Reading.


On the sales side, CenturyLink saw revenues drop by 4.2% for the last three months of 2016, to about $4.3 billion, compared with the year-earlier period, while net income tumbled to just $42 million from $338 million.

Post expressed his own disappointment with the results, which missed company expectations, and blamed slower growth in various strategic areas than CenturyLink had originally predicted.

In particular, there was a slowdown in the rate of growth in business high-bandwidth services, with lower sales of MPLS and Ethernet services than expected.

"These results drove us to miss the targets we established at the beginning of the year and to come in at the low end of our fourth-quarter guidance," said Post. "There are definitely a number of bright spots in our results, but as I look back at 2016 we didn't deliver at the level we expected."

CenturyLink now expects revenues this year to be lower than in 2016 as growth in strategic business areas fails to offset the decline in sales of legacy products.

It is currently guiding for between $17.05 billion and $17.3 billion in sales, having made $17.5 billion last year.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

(0)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View        ADD A COMMENT
Featured Video
Upcoming Live Events
September 17-19, 2019, Dallas, Texas
October 1-2, 2019, New Orleans, Louisiana
October 10, 2019, New York, New York
October 22, 2019, Los Angeles, CA
November 5, 2019, London, England
November 7, 2019, London, UK
November 14, 2019, Maritim Hotel, Berlin
December 3-5, 2019, Vienna, Austria
December 3, 2019, New York, New York
March 16-18, 2020, Embassy Suites, Denver, Colorado
May 18-20, 2020, Irving Convention Center, Dallas, TX
All Upcoming Live Events