CenturyLink (CTL), owner of Savvis cloud services, took a $1.1 billion Q3 charge because its data hosting business isn't growing fast enough.
CenturyLink CEO Glen F Post: Data hosting business isn't meeting growth forecasts.
CenturyLink (NYSE: CTL), owner of the Savvis cloud services business, has taken a $1.1 billion Q3 2013 charge to write down the value of its data hosting business. At first glance the charge could involve slower-than-expected growth with Savvis, which ranks among the world's Top 100 Cloud Services Providers. But Talkin' Cloud has not confirmed that CenturyLink's hosting growth challenges involve Savvis.
CenturyLink acquired Savvis in 2011 for $2.5 billion plus $700 million in assumed debt. CenturyLink's website also mentions data hosting services that apparently don't involve Savvis. In a Q3 2013 earnings statement today, CenturyLink conceded that its data hosting business isn't growing as quickly as hoped.
According to a prepared statement from CEO Glen F. Post III:
"While we continue to be optimistic and encouraged about the future growth potential and value of our Data Hosting business, we are not currently achieving the forecasted growth and cash flows we originally projected. As part of our accounting valuation process, past performance was a factor in the development of growth projections for our Data Hosting business in future periods."
"We are taking steps to drive revenue growth and margins to be more in line with industry trends going forward and we expect to achieve significant improvement in our Data Hosting results in the months and years ahead."
CenturyLink said Q3 2013 revenues were $4.1 billion, down about 1 percent. Talkin' Cloud does not believe that CenturyLink broke out its cloud services and hosting revenues but we're double-checking. Talkin' Cloud is listening in to CenturyLink's more detailed earnings call to see if the company shares additional information about its cloud and hosting business.
Updated 8:14pm ET, Nov. 6, 2013:
In an earnings presentation for analysts, CenturyLink said it witnessed:
- Weaker-than-expected sequential data hosting revenue trend primarily due to one-time credits and legacy Qwest Hosting churn. Overall, the company still expects hosting revenue growth in 2H 2013 vs. 1H 2013.
- Solid hosting sales during the quarter including accelerating sales to network customers.
- Data hosting year-over-year growth was weakened by impact of large client bankruptcy-related churn and price erosion in previous quarters.
- Manage hosting revenue up 15 percent from year-ago quarter.
Updated 10:02pm ET, Nov. 6, 2013:
During the earnings call with analysts, CFO Stewart Ewing offered these additional clues:
"Moving to Slide 17 and our data hosting segment, which includes all colocation, managed hosting, cloud services and hosted related network services revenues. This segment generated $342 million in operating revenues, representing an increase of 4.6% from third quarter 2012 revenues of $327 million.
Third quarter 2013 revenues include approximately $14 million of revenue contribution from the Ciber IT outsourcing assets we acquired in October 2012. Data hosting year-over-year revenue growth was weakened by the impact of large client bankruptcy [side note: likely Kodak, Talkin' Cloud believes] related churn and price erosion in previous quarters.
Data hosting operating expenses were $274 million in the third quarter compared to $246 million in third quarter a year ago. This 11% increase is driven primarily by higher employee costs related to the Ciber and Appfog acquisitions that were not present in the prior period. Despite recent weakness, we expect long-term improvement in both revenue and margin trends across the data hosting segment and continue to leverage its assets to drive additional revenue through cross-selling opportunities in our other sectors."
Bottom line: 4.6 percent growth in the cloud, managed and colocation markets isn't all that impressive.