Cloud Services

CenturyLink Revs Up Enterprise Engine

CenturyLink gave its investors and the industry in general a solid view of what it plans to be post-merger with Level 3 Communications this week, and the change is expected to be quite significant.

"The company we expect to be by late 2017 will clearly be much different than we were coming into this year," Glen Post, president and CEO, said on this week's earnings call, according to a Seeking Alpha transcript. Post then went on to spell out his intent to make CenturyLink "one of the leading network providers to Enterprise customers in the world" after the Level 3 merger closing, which is expected in September.

That call followed the announcement earlier this week of the initial selections for Post's new management team, which drew heavily from CenturyLink's current executive ranks but included two key Level 3 Communications executives: CFO Sunit Patel and Laurinda Pang, who has headed the North American and Asia-Pacific markets for Level 3 and will take on even more as executive vice president, global accounts management and international for CenturyLink. Pang will be responsible for sales and service for enterprise customers in APAC, EMEA and LatAm markets.

Patel is widely regarded for his financial expertise and steady hand, notes Brian Washburn, analyst with GlobalData. "He's someone who can make things work even when stuff goes off the rails," he comments.

That could be important for CenturyLink if another recession hits the US market, which has been in a period of slow but steady growth, because the company has "signaled its plans to keep up its dividend payments after it merges with Level 3, which is going to make investors happy, but will put financial stress on the company from the outset," Washburn says.

Want to hear more about CenturyLink's internal transformation? Join us in Austin at the fourth annual Big Communications Event where CenturyLink CTO Aamir Hussain is a keynote speaker. There's still time to register and communications service providers get in free.

Both Washburn and Roz Roseboro, senior analyst with Heavy Reading, think a merged CenturyLink and Level 3 will be a stronger competitor for multinational business globally and can leverage advantages each has developed in the NFV and SDN space. But the new company will obviously be facing major competition in its push for multinational companies, from traditional rivals AT&T and Verizon, and from a wide range of global players including NTT, BT, Vodafone and more.

Unlike its US counterparts, CenturyLink doesn't have a wireless operation, nor is it trying to buy digital media or content, Roseboro notes, and that could have an upside. "They aren't getting distracted by those other things," she comments. "They can say their focus is stronger."

Weak first quarter
CenturyLink is coming off a first quarter that left financial analysts unimpressed. As Jefferies analyst Mike McCormack noted, the company had the benefit of headcount reductions and a one-time $15 million tax benefit but still reported EBITDA that was weaker than expected at $1.51 billion. The expectation range was $1.52 billion to $1.54 billion.

Level 3's earnings also missed analyst estimates by two cents, at 34 cents per share, but its revenues of $2.05 billion, while flat year-over-year, exceeded analyst expectations. The company also was hit by a $44 million loss caused by debt refinancing that reduced its earnings further to 26 cents per share.

Post painted a picture of a rosier outlook going forward, based on projected growth rates from US enterprises for both high-bandwidth data services and managed network services, through 2021. High bandwidth services are already a critical market for CenturyLink, representing 70% of its total strategic revenues today and 80% going forward without colocation revenues.

Adding Level 3 to the mix will make those services an even higher percentage of overall strategic enterprise revenues, he said, "and our combined company will have greater scale along broader and enhanced solutions that should position us to drive future growth in high-bandwidth data services revenue."

Adding Level 3's global network, its existing base of customers and its "boots on the ground" in global markets will be a definite lift for CenturyLink's status among multinational customers, analyst Washburn says.

"CenturyLink does have a fair selection of MNC customers -- they started beating the drum as a global player, but they've had a lower profile," Washburn says. "Now they get all of Level 3's fiber and their enterprise base and they can start running all that MNC traffic over Level 3's network and leverage Level 3's metro agreements. More importantly, they have access to their global personnel -- the boots on the ground -- for sales and for support, and that's a key thing CenturyLink has lacked."

CenturyLink would thus become a more attractive alternative to US-based multinational companies, he notes. Level 3 is particularly strong in the Latam market, often the "shining star" of its global portfolio, when it isn't being buffeted by currency issues, Washburn adds.

Domestically, the combination of CenturyLink's fiber network -- which includes the former Qwest fiber -- and the Level 3 fiber network, which rolls up all of that company's many acquisitions, creates a robust fiber footprint with "a lot of possible routes and options for companies looking to get into long-haul markets and take that metro network to the building." Washburn adds. He expects the merged company to be fairly efficient in combining its core network.

Differentiated services
CenturyLink has been aggressively pursuing a virtualization strategy and has a strong cloud-based network functions virtualization platform. It has deployed SD-WAN services built on an open white box, a virtual CPE solution to which other functions can be added, Washburn says. To that it can add Level 3's SDN-based Adaptive Network Control services, which were developed years ago now by tw telecom, before SDN was a branded technology, but remain industry-leading for offering flexible bandwidth.

The combination is an attractive one, says analyst Roseboro, and that could make CenturyLink a strong competitor.

"If they are able to achieve the results they are trying to get from all their virtualization -- which they are doing more in-house -- then they will have some efficiencies and savings that will enable them to be more competitive on price," she adds. "Is this going to put them in any significant position to compete favorably with AT&T and Verizon? I think it's too early to tell."

One problem CenturyLink will face is that the US-based competition is also so strong in the NFV-SDN realm, Washburn says. AT&T has its own version of on-demand services as does Masergy, a managed service provider, and Verizon is pushing forward on the NFV-SDN front as well, with a new white box of its own rumored to be on the horizon.

There are other service offerings that will have to be harmonized -- each company has made a major push into managed security, with Level 3 adopting an aggressive analytics-based approach. CenturyLink also plans to remain active in managed IT services, despite selling off its data centers.

Post told analysts that confusion over that strategy depressed CenturyLink's managed hosting business in the first quarter, disrupting sales momentum, but he considers that a temporary condition which will be turned around this year. He pointed to the Cloud Application Manager suite launched earlier this year to enable businesses to manage hybrid/multi-cloud environments, as a key element of that strategy going forward.

CenturyLink will still very much be in the domestic telecom business as well, of course, but as Post made clear in this week's earnings call, the company's focus going forward, for better or worse, is on being the best at business services.

— Carol Wilson, Editor-at-Large, Light Reading

kq4ym 5/17/2017 | 12:55:08 PM
Re: Capex saving of NFV The boom and bust cycles could surely affect CentruyLink bigtime. Although it's hard to guess whether that would be a negative or positive without a crystal ball. Since " CenturyLink doesn't have a wireless operation, nor is it trying to buy digital media or content," it could weather a storm based on it's strengths there, but on the other hand might lose out to more diversified corporations.
danielcawrey 5/7/2017 | 12:24:43 PM
Re: Capex saving of NFV One does have to wonder if we're going to be in for another downturn in the future. The economy goes through boom and bust cycles. Given the issues with Europe and China rigt now, another recession would not surprise me. 
James_B_Crawshaw 5/6/2017 | 3:40:31 AM
Re: Capex saving of NFV A back-of-the-envelope suggests it is not unrealistic.

If 50% of their capex is electronic equipment, and 50% of this can be virtualized, and virtualizing (different VNFs sharing the same servers) reduces costs by 50% then capex can be reduced by 12.5% (0.5*0.5*0.5). You might need a bit more justification to get it by the CFO though. 
Carol Wilson 5/5/2017 | 5:18:56 PM
Re: Capex saving of NFV James, do you think that's unrealistic?
James_B_Crawshaw 5/5/2017 | 3:44:54 PM
Capex saving of NFV Apparently they aim to knock $200m a year off their capex budget once the "build out of the virtualized networks" is complete in 2019. That's about 7% of last year's spend and 8% of this year's. That is quite a chunk of free cash flow if they deliver. 
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