CenturyLink SD-WAN revenues blossom in Q1, but MPLS still king

CenturyLink headquarters
At its headquarters building, CenturyLink is making strides with its SD-WAN services while also reaping the rewards of its MPLS service. (CenturyLink)

While CenturyLink's SD-WAN revenue increased by 45% in the first quarter, MPLS remained a much bigger cash cow.

During yesterday's first-quarter earnings report, CFO Sunit Patel outlined the growth rates for both software defined wide area networking (SD-WAN) and multiprotocol label switching (MPLS).

While SD-WAN revenue growth was impressive in the first quarter, it only accounted for less than 1% of total revenue. By contrast, MPLS grew by 3% in the same quarter but racked up 14% of CenturyLink's revenue base, according to a SeekingAlpha transcript of the earnings call.

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With the combination of software and cloud computing, SD-WAN enables point-to-point networking across various connections while also unifying network management across a WAN.

For customers, SD-WAN can cut down on the use of the more expensive MPLS connections by shifting between public internet or private MPLS connections. Using policies that are located in a central controller, SD-WAN software forwards traffic across a link that is best suited to handle that flow's service level agreement (SLA) requirements without needing a network engineer.

While SD-WAN was originally pitched as a cost-saving option over MPLS for service providers' enterprise customers, for the most part, that hasn't happened. Case in point: CenturyLink's customers want both SD-WAN and MPLS, which Patel referred to as "VPN."

"We're excited about our SD-WAN offering and optimistic about the long-term potential," Patel said. "From what we are seeing in our sales funnel, customers who are interested in SD-WAN are generally asking for both SD-WAN and VPN in their requirements. We view these products are complementary."

Operators have invested heavily in their MPLS services over the years, and reaped the rewards. While SD-WAN and MPLS appear to be complementary instead of mutually exclusive, operators could make their SD-WAN offerings less compelling if they priced them closer to what they are charging for MPLS, which in turn earns them almost the same amount.

CenturyLink COO Jeff Storey said that CenturyLink's physical infrastructure, which was boosted by its merger with Level 3 Communications, allowed it to reach places that it couldn't previously with SD-WAN. Storey said on the earnings call that CenturyLink could layer SD-WAN on top of its physical layer to reach more customers.

"When we go to a customer with an MPLS solution several years ago, we didn't necessarily have the opportunity to go down and pick up their really small sites," Storey said. "SD-WAN gives us that capability."

RELATED: CenturyLink says there's growth potential in MPLS, SD-WAN

With the physical infrastructure in place, Storey said CenturyLink viewed SD-WAN as an opportunity to gain more market share both inside its footprint with existing customers and outside of its footprint with new and existing customers.

With SD-WAN offerings from Verizon, Comcast and AT&T, among many others, CenturyLink faces a crowded field when competing outside of its footprint, but Patel pointed to the telco's large national network footprint as one of its advantages.

"The underlying thing is the physical footprint is a precursor to being able to offer SD-WAN services," Patel commented. "I think that's the big missing piece. And with both the companies coming together, our network footprint is pretty large and very competitive with anyone out there and probably gives us a lot of superiority. So our ability to win SD-WAN, given our physical footprint vis-à-vis anyone else, gives us tremendous advantage to gain market share, as Jeff pointed out."

After a four-month trial in 2015, CenturyLink launched its multitenant SD-WAN service in 2016. The telco announced managed hybrid SD-WAN services in July of last year. CenturyLink is working with Versa Networks and Cisco for its SD-WAN services.

In its first earnings call since the Level 3 deal was completed, CenturyLink reported $5.95 billion in revenue for first quarter compared to $4.21 billion in the same quarter a year ago. Diluted earnings came in at 11 cents per share compared to 30 cents per share in the first quarter of 2017.

CEO Glenn Post has worked at CenturyLink for 40 years, including 26 years as CEO. Storey, the former head of Level 3, will take over as CEO and president of CenturyLink when Post retires at the end of this month.