The acquisition of Level 3 could boost CenturyLink Inc.'s (CTL, Financial) financial outlook. It is expected to deliver further synergies and improve the company’s competitive position.
Investment in new products could enhance the customer experience and improve retention rates. A network expansion strategy will incorporate investment in 5G, which is expected to be a revenue growth opportunity.
Although reduced capital expenditures and declining subscriber numbers are potential risks, the business is putting in place an increasingly disciplined investment strategy. It is also exiting less profitable contracts and prioritizing margins over sales. Having fallen 4% in the last year versus a decline of 7% for the S&P 500, the stock could have investment appeal.
Acquisition
The acquisition of multinational telecoms and internet service provider Level 3 could catalyze CenturyLink’s stock performance. It has achieved a total of $790 million in annualized run rate adjusted earnings before interest, taxes, depreciation and amortization synergies since the deal closed a year ago. It expects to achieve its targeted $850 million run rate adjusted EBITDA synergies before the end of the year. It continues to consolidate Level 3’s real estate, while it is making progress in combining wholesale-oriented billing systems related to intercarrier compensation.
Following the acquisition, CenturyLink has also completed its enterprise resource planning in the North America and Asia Pacific regions. Legacy revenue churn has been in line with expectations, while customer retention has been strong. The company has recorded three successive quarters of enterprise sales growth following the acquisition. It will now focus on cost and digital transformation after a successful initial integration period.
Investment
CenturyLink’s increasing focus on product evolution may provide greater differentiation and a competitive advantage. It recently introduced dynamic connections as part of its cloud connect portfolio. The company is leveraging its networking technology to provide customers with the capacity to establish new ethernet connections to cloud service providers in a short span of time. This is part of a move toward being a technology, rather than telecom, company. It is seeking to make it easier for customers to utilize technology on a global platform, while providing greater flexibility. One example of this is an ability for enterprise customers to securely connect their private data centers directly to the cloud, only paying for the time they maintain the connection.
The company has also expanded its SD-WAN solutions, which are now available in over 30 countries across the Americas and Asia Pacific. This enables a single, global hybrid networking solution that pairs SD-WAN with any combination of the company’s network solutions. This is expected to provide an improved experience for the company’s customers, forming part of a wider ecosystem of technology products and services.
Its investment in 5G is a key part of the company’s network expansion strategy. It represents a revenue growth opportunity as CenturyLink extends its fiber footprint closer to its enterprise and consumer customers. It expects to partner with wholesale providers to use their 5G access technology as it seeks to improve its overall customer offering.
Risks
CenturyLink continues to record declining customer numbers. In the most recent quarter, it saw a net loss of 63,000 broadband subscribers. All of its business units and service types experienced revenue declines. It also announced a significant decrease in planned capital expenditures, forecasting 13% of revenue for the current fiscal year. Previously, it was projected to be 16% of full-year revenue. This could mean a higher level of capital expenditures required in the coming years in order to support long-term growth.
The company’s reduced capital expenditure, though, is part of a wider plan to put in place a more disciplined approach to investment. It has decided to reduce its investment in copper-based plant for the consumer business, redirecting it into its fiber footprint in order to boost its micro-targeting strategy, with the policy expected to deliver relatively high returns. Its decision to take action on unprofitable contracts negatively impacted short-term sales, but may improve long-term profitability.
Outlook
The continued integration of Level 3 could provide further synergies and enhancements to CenturyLink’s competitive position. Its shift to becoming a technology-focused business will lead to the release of new products, which may improve the customer experience and build customer loyalty.
Investments in 5G as well as a more disciplined approach to capital expenditures may enhance the financial performance of the business. It could help it to overcome the decline in subscriber numbers and revenue, while exiting less profitable contracts may boost margins. Having outperformed the S&P 500 in the last year, the stock could have investment potential.
Read more here:
- Some Thoughts on FedEx
- 3 Deep-Value Stocks for 2019
- 2 Energy Stocks to Consider as Oil Prices Rise on Trade Talks, Supply Cuts
2 Energy Stocks to Consider as Oil Prices Rise on Trade Talks, Supply Cuts2 Energy Stocks to Consider as Oil Prices Rise on Trade Talks, Supply Cuts
