CenturyLink's overall business isn't meeting Wall Street's long-term expectations. But the deeper disappointment involves the company's cloud services business -- which is actually shrinking while the overall market continues to enjoy double-digit growth. Further complicating matters, CenturyLink doesn't expect to complete the strategic review (i.e., potential sale) of its data center and co-location business until Q3 or Q4 of this year, the company said during an earnings call yesterday.
For its quarter ended March 31, 2016, CenturyLink said:
- Colocation revenues were $155 million, down about $1 million from the corresponding quarter last year.
- Managed hosting and cloud revenues were $131 million, down about $9 million from the corresponding quarter last year.
- Hosting area network revenues were $21 million, down about $1 million from the corresponding quarter last year.
- Roll those numbers together, and CenturyLink's overall hosting and cloud revenues were $307 million for the quarter, down about $11 million from the corresponding quarter last year.
It wasn't supposed to be this way. Indeed, five years ago CenturyLink an other telcos believed they could compete head-on against Amazon Web Services in the public cloud market. That ambition inspired CenturyLink to buy Savvis for $2.5 billion in 2011. Around he same time, Verizon acquired Terremark and Time Warner Cable purchased NaviSite.
Fast forward to present day. Amazon's AWS revenues continue to grow rapidly, surging 64 percent to $2.6 billion in the company's Q1 2016. Generally speaking, CenturyLink and Verizon in particular haven't been able to keep pace.
Verizon has essentially abandoned its public cloud and will instead focus heavily on private clouds as well as secure network connections to Azure and AWS. Somewhat similarly, CenturyLink has been exploring the sale of its co-location business and/or related data centers -- while doubling down on networks.
CenturyLink: Networks vs Data Centers
During an earnings call with Wall Street analysts yesterday, CenturyLink CEO Glen Post and his lieutenants described how the company will focus on less capital-intensive initiatives. That's basically double-speak for spending less on cloud data centers and doubling down on network solutions, ChannelE2E believes.
Indeed, companies of all sizes are discovering that it's very expensive to build out massive cloud data centers. Even Microsoft has experienced falling cloud margins amid its own data center expansions.
With that reality in mind, CenturyLink's Post yesterday said the company will:
- "Invest with discipline and with a focus on network first."
- "The network is our key strategic advantage and is the foundation of the value we deliver to our customers."
- "There remains tremendous demand for colocation services in both the U.S. market, as well as the international markets we operate in. While we like the colocation business, we believe our priority for capital investments is in the network to protect and grow our consumer and business network market positions."
In the meantime, the data center business is showing signs of strain.
On the upside, CenturyLink now has 1.01 million square feet of billed data center space, up from 0.93 million billed square feet in the corresponding quarter last year. But remember: CenturyLink's overall cloud and hosting revenues are falling -- which means each square foot is producing less revenue even as customer occupancy has increased. That's like adding more and more tenants to a housing complex, only to see total revenues for the complex fall...
CenturyLink Data Center Sale?
CenturyLink has been shopping is data center business to potential buyers and alliance partners since last year. Post is warning investors not to expect overnight results from those discussions.
"Our strategic review is ongoing," he said during the call. "We have received a strong level of interest from numerous strategic and financial parties. We expect to start narrowing this down to a shorter list over the next few weeks; and we expect to finalize the process in late third or early fourth quarter of this year."
According to Post, the strategic review could result in:
- A sale of all or a portion of the data centers;
- a partnership or a joint venture; or
- possibly retaining the data center assets as part of CenturyLink's portfolio.
"In all cases, we look for the best way to create accretive value for CenturyLink and our shareholders and continue to provide a strong colocation competitor in the market for our customers," he said.
Still, CenturyLink's cloud services and hosting revenues are falling at a time when the overall market is growing rapidly. That's not a good sign for partners and customers that continue to bet on CenturyLink.