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Analyst Blog

On Dec 13, we maintained our Neutral recommendation on CenturyLink Inc. (CTL - Analyst Report). The company is characterized by a reformed business structure, broadband expansion, faster fiber builds, better cloud computing services and penetration of Prism TV into new markets.

However, deteriorating legacy voice and access revenues due to wireless substitution remain significant risks to the carrier. The leading landline operator holds a Zacks Rank #3 (Hold).

Why Maintained?

CenturyLink has redesigned its operating segments to strengthen its grip over the market as well as remain fully committed to wholesale, hosting and consumer customers. Owing to its long-standing ties with clients by bundling of integrated services, launch of new and attractive services, consistent technology upgrades and infrastructure enhancement, the company has witnessed a slower rate of revenue declines.

The landline carrier is continuing with its fiber-to-the-tower (FTTT) expansion, and remains on track to build 3,500 to 4,000 fiber towers in 2013, which is slightly below its previous expectation of 4,000 to 5,000 towers. The fiber build will position the company for long-term growth and reduce the current revenue compression by early 2014.

CenturyLink continues to expand its multi-tenant unit (MTU), which provides enhanced cloud services to business houses with 500 MB of service. Apart from MTU, CenturyLink is focusing on GPON technology, which offers a broadband speed of up to 1GB. Both MTU and GPON are appealing to business customers, as high upstream speeds are generally required for smooth cloud services.

Additionally, the company continues to focus on data centre expansion and plans to add 87,000 square feet of space within 2013 in order to generate higher revenues in collocation and managed hosting and cloud services.

However, the company’s core local phone business has slowed considerably due to consistent decline in access lines. Substitution of traditional wireline telephone services by wireless and other competitive offerings and lower long distance minutes of use are resulting in poor performances.

CenturyLink is facing problems in gaining market traction for Savvis products, as some of its large clients are building their own data centers, thus eliminating their exposure to Savvis. Additionally, the company expects cash flow pressure to continue as it shifts more toward low margin products and the cost synergies from the Quest acquisition are nearing an end. Thus we maintain a cautious view on the company.

Other Stocks

Companies operating within the telecommunication sector that are worth taking note of include Hawaiian Telcom Holdco Inc. (HCOM - Snapshot Report), Chungwa Telecom Company Ltd (CHT - Analyst Report) and Level 3 Communications Inc. (LVLT - Snapshot Report). HCOM carries a Zacks Rank #1 (Strong Buy) while CHT and LVLT stocks currently carry a Zacks Rank #2 (Buy).

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