Analyst: US Telcos Should Consider Selling Hosting Units

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This article originally appeared at The WHIR

Investment banking firm Cowen and Company initiated coverage of CenturyLink with a call for the telco to sell its cloud-based web hosting business. The analysis is part of a broad examination of CenturyLink’s revenue streams and is representative of the telecom cloud provider segment more generally, according to Cowen analyst Gregory Williams.

“The investor community has pressured the company to sell the hosting business,” wrote Williams. “However, management remains adamant that the colocation/hosting business is a key differentiator and integral growth driver of the story.”

In giving CenturyLink a neutral rating and a target price of $28 per share, Williams notes that the company’s S&P-best 8.4 percent dividend is balanced by a need to stabilize revenue with diverse performance across different business divisions. CenturyLink shares were up slightly in Wednesday afternoon trading at just above $26.

“Since acquiring Savvis … the hosting product segment could be seen as a disappointment as the segment experienced elevated (customer) churn, a $1.1 billion asset write-down in 2013 and grew just 4.5% in 2014,” Williams said.

He also noted that telecom companies have generally struggled in the cloud computing field, and that the two larger US telecoms Verizon and AT&T could also sell their “colo/hosting business assets.” Verizon jumped into the cloud business with the 2011 acquisition of Terremark for $1.4 billion.

Williams also points out that Congress could renew a tax law which would allow CenturyLink and similar companies to deduct capital equipment purchase costs immediately instead of gradually, which would reduce their tax burden.

While time will tell whether CenturyLink management are correct about the importance of its cloud-based hosting services, or the investor community is right and they should leave hosting to the more IT and networking-focussed companies which seem to be having more success, CenturyLink appears to be fully committed to the hosting business.

Savvis was merged into CentruryLink in a $2.5 billion deal completed in 2011, before the Savvis brand was retired early in 2014. Since then CenturyLink has grown its hosting and cloud services portfolio with several product launches and acquisitions, including the April purchase of NoSQL DBaaS company Orchestrate. CenturyLink was even rumored to be a possible buyer for Rackspace last year.

This first ran at http://www.thewhir.com/web-hosting-news/us-telecoms-could-consider-selling-hosting-units-analyst