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Can CenturyLink's Business-Focused Strategy Spur Growth?

On April 13, 2016, Zacks Investment Research downgraded leading local exchange carrierCenturyLink Inc.  CTL to a Zacks Rank #3 (Hold).

The company has been investing in fiber-to-the-tower (FTTT) expansion and to this end, has expanded its fiber-based backhaul services to over 21,000 towers as of 2014-end. Further, CenturyLink expects its Managed Office and Managed Enterprise Solutions to continue gaining traction and drive revenue growth on the back of rising demand from small and large business customers.

CenturyLink has been trying all means to establish itself as a global leader in cloud infrastructure and hosted IT solutions arena designed for enterprise customers. Further, the company’s strong network capabilities, integrated hosting and network solutions will promote growth in the cloud business. Also, CenturyLink is focused on bringing improved operating efficiencies through a number of methods including network simplification and rationalization.

CenturyLink recently inked an agreement with leading cybersecurity analytics firm WISeKey to offer cybersecurity services for Internet of Things (IoT) providers. The companies hope to leverage each other’s capabilities to provide seamless managed services for the IoT businesses. Recognizing the need to provide security services for such data transmission purposes, we believe CenturyLink’s tie-up with WISeKey will give the company a strong opportunity to generate healthy revenues in the future.

However, CenturyLink’s core local phone business has slowed down significantly. This is primarily due to the substitution of traditional wireline telephone services by wireless carriers like Verizon Communication Inc. VZ and AT&T Inc. T. In addition, the company also faces intense competition from cable TV operators like Frontier Communications Corp. FTR, which aggressively offer traditional voice, Internet TV and cloud services over their networks. Additionally, CenturyLink’s outlook for colocation revenues does not appear very exciting. Colocation revenues are shrinking and the company is looking for ways to avoid investing more capital in the segment. As of now, CenturyLink is looking to monetize these assets over the near term.

Moreover, the dynamics of the communication industry is significantly governed by technological innovations. Changes in technology compel large investments, which can dilute cash flow. This could substantially impact its ability to meet debts and other obligations. Alternatively, if CenturyLink fails to adopt new technology or network upgrades, it might result in greater subscriber loss to larger competitors, moving forward.

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