Q3 2019 Earnings Call

Greetings and welcome to the Centurylink third quarter 2019 earnings call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the floor on your telephone.

With that anytime during the conference you need to reach operator, Please press Star Zero and that's a reminder, this conference is being recorded Wednesday November six 2019, and it's now my pleasure to turn our conference over to Valerie Finberg, Vice President of Investor Relations. Please go ahead.

Thank you can.

Good afternoon, everyone. Thank you for joining us for the Centurylink third quarter 2019 earnings call.

With us on the call today are just storey president and Chief Executive Officer, and Neil Dad, Executive Vice President and Chief Financial Officer.

Before we get started I need to call your attention to our safe Harbor statement on slide two of our Threeq you 19 presentation, which notes at this conference call May include forward looking statements subject to certain risks and uncertainties.

And we will refer to certain non-GAAP financial measures, which are reconciled to the most comparable GAAP measures.

Reconciliations can be found <unk> earnings press release or supplemental schedule.

Additionally, please note that certain metrics discussed on the call today exclude transformation costs and other special items as noted in our earnings materials, but that I'll turn the call over to John like salary and thank everyone for joining us on.

On today's call I'll give you an update on the state of the business Neil will provide an overview of the quarter's financial results and then we'll go into your questions.

During the quarter, we continued executing on our strategy around four key areas investing in growth through product and network expansions delivering an enhanced customer experience across our business.

Transforming the operations of our company to improve efficiency and employee experience and de levering to further strengthen our balance sheet.

Our expanding adjusted EBITDA margin and year over year revenue growth and I am enterprise and consumer broadband demonstrate these efforts are making a difference.

Our focus on providing innovative networking solutions continues to resonate with our large business customers.

I am in enterprise in addition to the year over year revenue growth, we followed strong sales in the second quarter with tire sales this quarter.

Included within the Enterprise segment results as our federal sector, we're seeing early wins under the federal Yeah, Yes contract. We believe we're well positioned to grow our federal relationship under this new contract vehicle.

We're seeing mixed results in our SMB segment.

Biggest challenges offsetting pressures from legacy services, such as PD onboard, but by tailoring product capabilities, specifically for this customer segment products like unified Communications as a service network security and that's the when we bring much needed solutions to the market for SMB customers.

We believe we operate one of the world's most extensive and capable fiber networks for business in wholesale customers. We continues to focus investments on improving that advantage by expanding our network reached a new buildings during the quarter. We added approximately 4900, new fiber fed buildings, bringing.

Year to date totaled roughly 14500.

These investments are particularly relevant to the SMB customers located in those buildings. Our sales team is focused on leveraging these investments both within and beyond our legacy like footprint utilizing the entire centurylink fiber footprint. Our team is intent on becoming a major provider to SMB customers throughout the.

You asked.

Excited about the opportunities for SMB and expect improved performance in the future.

Our wholesale results met our expectations well revenue can be lumpy in any given quarter. The market is large and centurylink as a key player. We do however continue to expect this segment to decline overtime.

So to some extent by our expanding on that footprint and Ethernet capabilities.

We're obviously focused on leveraging the power of our fiber network to drive growth in all of our business segment I don't feel like the highlights some of the ways, we're enhancing the products and the capabilities, we deliver across our platform.

We continue to enable our dynamic connections product, which provides our customers real time and self serve access to secure multi cloud connectivity across thousands of global endpoint last month, we announced that we added Google club two hour equal eco system.

Surely after that announcement, we have customers logging into our dynamic connections platform to connect workloads to the Google cloud.

Hi, without having to call us or established new physical connections.

On our second quarter earnings call, we announced plans for our edge computing solutions, which combines our edge computing infrastructure without an incredible fiber network dynamic connections offerings cloud application application management tools and managed services portfolio.

We've already begun closing cells. This new newly enabled offering with recently closed the deal to support a global edge computing solutions, one I T intensive securities trading customer.

Our edge computing capabilities enabled the customer to move trading system workloads closer to the digital interactions with other trading platforms all over the world.

Our solution provides the customer fully managed compute storage network managed security and market conductivity monitor 24, seven by managed services team aligned to financial services industry best practices.

We're enriching our CDN platform, both organically by expanding our capabilities capacity and footprint and inorganically through the acquisition of technology companies like the stream or acquisition, we announced in September I won't go too far into the details the streaming streamer gives us disruptive technology that a name.

Well, it's connected devices to deliver content through secure and privately meshed networks.

We continue to expand our overbuild of the nationwide ultra low loss fiber infrastructure discussed on the second quarter call by leveraging our significant conduit infrastructure. We're deploying this next generation fiber network at what we believe are significantly lower costs and a much faster time to market.

Investments in these capabilities are leading customers to select century link to support their complex and tech networking and technology needs.

As an example, I'll briefly discuss our relationship with Chick flick before I get into the details I have to say that personally I'm an avid stand it took to like it's certainly starts with liking the food, but I also appreciate the way they've integrated technology into providing a superior customer experience <unk>.

Even further enhanced that customer experience Chick Fil a required increased bandwidth capabilities at the restaurant, which we supported with fiber investments to hundreds of locations nationwide fiber connectivity is a foundational component of the Chick Fil a digital strategy and is enabling many of their smart restaurant initiatives.

We continue to work with this customer to support their future digital requirements.

Turning to our consumer segment over the past couple of years, we've made strides in our efforts to transform our consumer business. We've simplified our go to market approach focusing on an easy to understand non promotional offerings known as price for life. This simplified product has significantly improved the customer and employee expense.

Yes, reduced marketing and customer care costs, lower churn and driven higher ARPU.

Coupled with our transformation initiatives, we focus on driving higher levels of digital interaction and customer self service.

You heard me say a number of times, we will grow where we invest and we continue to invest in deploying consumer fiber, where it is economical to do so in 2018, we shifted to a consumer investment strategy that was heavily weighted to fiber to the home solutions rather than investments in copper based technologies like bonding and.

Dr and.

We're seeing good success with this strategy micro targeting our fiber builds down to the neighborhood level and digitally targeting sales efforts down to the individual household.

As I said these efforts are paying off.

Through our price for life offer higher levels of fiber deployment and improved customer experience initiatives, we've seen year over year growth and consumer broadband revenue each and every quarter since the beginning of last year, we're very focused on accelerating that growth and while we certainly have more to do I'm pleased with our ability to operate.

Right, the consumer business to grow where we invest and to generate significant free cash flow.

I'd like to touch briefly on our ongoing strategic review of the consumer business.

We continue to make good progress with the review however, as I. Previously said these are complex assets and this is an extensive process. We believe there are good opportunities in the consumer business and we are dedicated to identifying the best path forward for our shareholders. We remain open to the various potential outcomes, but we won't give specific bits.

Sales until we complete the review and decide upon it dependent of course of action.

Yes.

Moving back to our overall strategy in tired thesis of our business is that we will build and leverage our extensive fiber network to deliver the capabilities our customers require for their own digital transformations.

As we looked at our company going forward, we have several strong beliefs that formed the basis of our strategy.

First of all the Reliance's enterprises networking solutions is growing not diminishing.

Customers need our products and services for artificial intelligence and big data augmented reality multi cloud environments and the exponential growth is I O T devices complex networking services are the key enablers for these applications.

Of course, we have to keep pace with technology advancements and adapt our products adapt our services and the delivery mechanisms to match, but that's the true opportunity for us to execute execute well in the market and we are intensely focused on it.

Secondly, whether compared to copper hybrid fiber co acts wireless or even five Gee. We believe fiber is the long term technology winner, we all spend a lot of time talking about wireless and it certainly has its place in the last few hundred feet, but there's no scalable communications technology, we're fibers.

Not the true underlying infrastructure like by private L. G. Four G. Oh go back to fiber as quickly as possible.

In fact, the key enabling technology for Fiveg will be the continual densification of our own fiber infrastructure.

Third for wholesale and enterprise customers direct fiber based services are clear favorite to wireless or copper solutions scalability reliability and affordability of fiber is unmatched by wireless free space optics, microwave HFC or any other transport technology you can name.

We will continue to invest and being the preferred provider of direct fiber based solutions.

Lastly investments in our digital transformation and expanding our fiber reach our investments in long life assets generate sustainable free cash flow into the future and are key to our growth and improving profitable revenue.

From a transformation perspective, we believe simplification and automation will drive they better employee experience a better customer experience lower churn improved sales an increase margins, we've made steady progress towards transforming our company during 2019 and have a milestone based set.

Of initiatives over the next few years to drive those outcomes.

In summary, we continue to invest in the growth of our business through product enhancement and network expansion, we remain focused on providing a superior customer experience by transforming the efficiency and effectiveness of our operating capabilities and we're committed to meeting our de leveraging objectives, while driving long term.

Sustainable free cash flow per share.

With that I'll now turn the call over to Neal to provide an update on our detailed financial results for the quarter Neil.

Thank you, Jeff and good afternoon, everyone.

I'll start with our financial summary on slide four for the third quarter 2019, we generated adjusted EBITDA of 2.261 billion.

Year over year, adjusted EBITDA margin expanded to 40.3% from 39 point, which on.

On the year ago quarter.

From a cost transformation prospective we achieved approximately 360 million of annualized run rate adjusted EBITDA savings, which compares to 290 million reported in the second quarter.

We are pleased with the improved revenue performance this quarter, specifically for idea and on our price.

Based on our year to date performance, we are reiterating all full year 2019 financial outlook measures.

While revenue decline.

Year to date adjusted EBITDA grew compared to those same period in 2018.

This growth was driven by improved revenue trajectory in our enterprise business. Our continued focus on profitable revenue.

Management of legacy product declines along with the benefits from our cost transformation initiatives.

Turning to Romney on slide five total revenue in the third quarter declined 3.64 sub Q 5.6, So 6 billion.

This compares to declines of 5.5 person in the second quarter and five person in the fourth quarter.

Before moving to revenue by segment I want to point out that you saw a substantial increase in U.S. off or Universal service fund rates this quarter.

Relative to the first couple of quarters. This year you us off revenue is up approximately 40 million this quarter.

Keep in mind. This was passed to revenue we collect for the FCC.

Sequentially, excluding those step up and you ourselves out I, just mentioned portal revenue decreased 0.2% compared to the 1.2 person sequential decline we saw in the second quarter and at 2.3 person decline in the fourth quarter.

Within our AGM segment revenue grew 0.8% year over year.

We saw currency pressures both year over year end sequentially.

On a constant currency basis revenue grew 1.9% year over year compared to 1.6 plus on growth in the second quarter.

Sequentially revenue was roughly flat.

As a reminder, last quarter benefited from strength to nonrecurring revenue approximately 15 million.

Moving to our enterprise segment revenue grew 3% both year over year and sequentially.

Adjusting for the step up in the U.S. off revenue grew 1.5% year over year and sequentially.

This compares to a decline of 1.2 person both year over year and sequentially in the second quarter 2019.

Revenue growth was driven by installs from sales or you're under your as well as strengthen the federal government channel.

Overall, we're pleased with the progress towards our objective of growing both again.

In enterprise revenue in the second half of 2019 compared to the first top of 2019.

SMB revenue decreased 6.4% year over year compared to a decline of 10% in the second quarter 2019 sequentially revenue declined 0.3% compared to a decline of 2.5% last quarter.

We continue to invest in our product capabilities and continue to feel good about our ability to sell into our on that building footprint with a larger addressable market opportunity.

Wholesale revenue decreased 6.6% year over year.

Sequentially, we saw an increase of 0.7% compared to a decline of 1.8% last quarter.

I'd like to point out that specific to the third quarter 2019.

We did see a benefit from a carrier settlement of approximately 15 million.

Turning to consumer on slide six third quarter 2019 revenue declined 9.2% year over year.

In the third quarter 2018 revenue was stronger due to a benefit of roughly 40 million from a revenue recognition related adjustment completed during the quarter I.

As a reminder, we adopted the new revenue recognition standard in 2018.

Excluding the benefit all that adjustment in third quarter 2018 revenue would have declined 6.7% year over year.

This compares to an 8% decline last quarter.

Sequentially revenue declined, 1.3%, which compares to declines of 1.7% in the second quarter and 1.8% in the first quarter.

Broadband revenue for the third quarter, 2019 grew 2.3% year over year, which compares to build a 1.8% last quarter.

Rob brand performance last year was largely driven by our price for life initiative.

This quarter and going forward.

Our performance will be a function of our fiber to the home investments and improving the penetration of our competitive assets.

In the third quarter, we saw a net loss of 36000 total broadband subs.

Speeds of 100, Mac and above we added 54000 subs.

I'd like to point out that for the third quarter 2019 versus the third quarter 2018, we have roughly doubled our greater than 100 Meg sub additions.

We also saw similar year over year growth in the first and second quarter of this year.

Turning to adjusted EBIT on slide seven for the third quarter 2019, adjusted EBITDA was 2.261 billion compared to 2.287 billion in the third quarter 2018.

As you think about EBITDA performance on a year over year basis keep in mind. The revenue recognition adjustment that I just mentioned benefited third quarter 2018 adjusted EBITDA.

On a sequential basis, we saw the typical increase in utility costs in our network facilities.

Adjusted EBITDA margin was 40.3% for the third quarter 2019, compared to 39.3% in the Euro go quarter and 35.5%.

At the close of the level three transaction.

I was hoping handle the third quarter, we've achieved approximately 360 million of annualized run rate adjusted EBIT our transformation savings.

Integration and transformation costs and special items incurred in the third quarter 2019 impacted adjusted EBITDA by 38 million.

And free cash flow by 52 million.

Moving to slide eight for the third quarter 2019 capital expenditures were 957 million.

We continue to invest in expanding our fiber footprint, adding building store not work and the initiatives Jeff mentioned already.

In the third quarter 2019, the company generated free cash flow of 983 million.

Turning to slide nine we exited the quarter with our net debt to adjusted EBITDA ratio at 3.7 times, which compares to 4.3 times of the close of the level three transaction.

During the quarter, we retired approximately 700 million adapt and through the third quarter. We have addressed roughly 1.5 billion through a combination of actions.

After quarter end in October we paid at maturity approximately 150 million in depth.

Including this fourth quarter transaction, we've paid down approximately 1.7 billion in debt obligations. This year.

In addition, we completed a transaction to refinance one building on our debt, which lowers interest costs and extends maturities.

As we indicated at the time do use proceeds will be used in the fourth quarter for redemptions.

We paid down 400 million a depth in October and we'll pay down 600 million in early December .

Overall, we remain highly focused on getting to our 2.75 to 3.25 net debt to adjusted EBITDA leverage target.

Turning to the business outlook on slide.

We continue to feel good with our progress this year and are reiterating all of our full year 2019 financial outlook measures.

In summary.

We continue remain focused on execution, specifically on improving revenue trajectory.

Maximizing profitability and staying disciplined on cost transformation.

Deleveraging.

Thank you Neil operator would you explain the process for questions.

Certainly.

If you would like to register a question. Please press the one followed by the four on your telephone you will hear Athree, Tom prompt to acknowledge your request.

If your question has been answered any would like to withdraw your registration. Please press. The one followed by the three one moment for the first question.

Sure.

And our first question comes from the line of Timothy Horan with Oppenheimer and company. Please go ahead.

Well. Thanks, guys can you discuss the booking trends how these kind of continued at all.

Third quarter, and maybe so far this quarter.

I Didnt I didn't hear the first part looking from booking trends.

So I think Tim for.

Both by again in the enterprise, we had a strong sales or bookings in the second quarter.

And sequentially it was up in third quarter relative to what we saw in second quarter for both again and enterprise.

And any more color and what's driving the strength in bookings.

I think it's our products and services in the way we deliver on when we have confidence in the marketing and.

The types of things that we sell our customers need the types of products and services, we have they're going to need in the future and I think it's just best and a good job in the market.

And expect to.

To continue.

Hope to continue.

Thanks, a lot.

Sure.

And our next question comes from the line of Simon Flannery with Morgan Stanley . Please go ahead.

Great. Good afternoon, Jeff you talked about that the customer experience and.

Trying to improve the efficiency of the network and it can you just give us a little bit more anecdotal what you're seeing on the ground and how thats transforming itself into the bookings for Tim was asking about him and maybe Neil just following up with the visibility you have into moving past see the 360 and continuing to.

Yes, good move towards the full program opportunity and over the next few quarters. Thanks.

Sure on the on the customer experience I mean, there's there's some things there just basic blocking and tackling doing a good job in service delivery doing having a reliable network and doing a great job in service assurance. Those are things that we focus on every single day part of it has to do with evolving our products. If you look at dynamic connections.

And you think about a customer experience, where they can all of sudden reroute traffic from one cloud location to another and it can be their own private data center to another private data center, but when they can re route capacity scale capacity up and down move it around however, they like without having to pick up the phone without having.

The call for us without having to wait for service delivery, that's a much better customer experience and so there were making enhancements in our products and services.

We're making enhancements continuing to move things on net more you're on net better reliability, the better experience our customers have.

So we're continuing to focus on a whole whole array of initiatives to drive the customer experience.

And our youth like your net promoter score is there any are you seeing any kind of metrics are things that dinner help help you kind of get more tangible about what how your had to customers are really feeling.

Sure and especially if you look at our consumer business and our fiber product our net promoter scores of has improved dramatically in and our.

Pretty good we were pretty pleased with the net promoter scores there and so yeah. We we look at a lot of internal metrics to know that what we're doing is actually affecting our customers and the performance that they're receiving is improving their experience overall.

Simon audio question on.

Visibility I think.

If we look at I guess and enterprise are 90 day funnel.

It is very healthily and more importantly, the conversations that we're having with the cost commerce.

Our very very positive in terms of what they're trying to do with their business. The two examples that Jeff gave in his prepared remarks, we're seeing a lot of those were out of the conversations I've been with CIO goes in terms of how they are trying to transform their business. So it's a very different discussion.

Where we can bring to bear our whole assets on capabilities and we're leaning in there and we're adding fiber into customers locations to enable a lot of that transformation.

Great and on on the I guess, that's good to see it means that something that will be you'll see much in 20 or is that it's going to take a while to get that through.

Yes, I don't want to predict specific timing on contracts that were seeing early success already.

We were the first company the beep certified or whatever the word was to receive.

It's through that contract and we're seeing that early success, it's a long term.

Contract.

Extends for years and years and I expect that that traffic will be moving and services will be moving.

To that contract over long periods of time.

Great. Thank you that of course, if we've seen results already I expect results in 2020 as well.

Yes. Thank you.

Sure.

And our next question is from the line of Frank Louthan Raymond James. Please go ahead.

Great. Thank you I'm looking at two to the World Digital opportunity fund auction how are you thinking that the the the change there from the current Caf two funding that you're getting.

What's sort of the point, where you might walk away from some of that are at auction I agree came in well below the cost model and likely this one probably would come in as well is there a point, where maybe you walk away from that and then with that where are you on the thoughts in the asset sales for our four for consumer or you closer to the end of that process.

And what completions that come to thanks.

Sure.

So I'll answer about past two and the digital opportunity fund make sure I'm clear I'll answer them separately, but no intention of walking away from Caf two we're doing a great job. We've got we're very far along the way of.

Building that out and so.

There's nothing I'm about to say changes any of that.

With respect to the digital opportunities on when would we walk away from it when it's not advantageous to our company.

It doesn't make sense for us do we want good and that's not a big problem for us, we only or gun going to do things that that makes sense. So we will be involved in the process. We will make sure that we fully evaluate what it means for Centurylink and if we can do something economically the benefits our shareholders will do it and if we don't will walk.

What.

Yeah, just to add to that I think flow things keep in mind is that there's an opportunity cost for us.

Dissipate.

So we know if you think about the our consumer management team.

And our planning teams et cetera, if we're going to participate we want to make sure. It's a it's economical it's a long car mass up that we can drive good penetration on and so that's what we will evaluate versus just participating before the end of the subsidy is good but theres also an offset on the capital side.

So we're going to look at the overall economics, Frank I think yeah, the second half essentially more asset sales of consumer.

Yes are we closer to the end of that process, yes.

[laughter].

So we're not there yet and we really won't talk about the the details of it.

What we are focused on in the consumer business is making sure we run the best consumer business possible, making sure that where we invest we grow.

And we're in we're introducing products and services and the customer experience that resonate with our customers and we're doing that and then we'll evaluate that and all of the other strategic options and we are evaluating that and all the other strategic options that are out there.

And I expect.

We're closer obviously to the end of it.

Okay any any other asset sales that you might consider real estate or other things you're not getting a lot of credit for on the balance sheet like healthy levering.

Yeah, we look at everything we tried to be diligent and disciplined about all of our assets and look at things periodically to make sure and I think there are some things that we're not getting.

The.

The full appreciation for the value of these assets and so if there is something that we can.

Divest if there is something that we can acquire where we think we can drive better free cash flow per share for our customers excuse me for our shareholders.

Then then we'll do that and we're pretty open and.

Agnostic about.

Theres nothing that.

That off the table.

As.

Not quite sure.

But yeah, I think you get the point.

Great all right. Thank you very much.

And our next question is from the line of David Barden from Bank of America. Please go ahead.

Hey, guys. Thanks for taking the questions I guess to follow up on that specifically, there's been reports out there Jeff that.

That centrally spin shopping the Latin American fiber assets and.

It seems.

Somewhat counter intuitive to me.

That is in fact going on just because it use pen focused on developing these enterprise services and assets on a global basis.

If you could kind of comment on on whether that's a real thing or not it would be helpful.

And then I guess just second on the.

This is a.

Pretty impressive pivot in some of the kind of fundamental AGM and enterprise business lift and I guess the question I have is just in terms of the kind of the composition of that lifted. It are we talking about kind of hundreds of smaller contracts that kind of or just going through the machine and getting installed and.

And kind of run rating or are these kind of kind of chunkier.

Big contracts like the federal contract that are kind of driving the business at the moment. Thanks.

Sure.

I'll try and answer a.

Question on Latam and all of our asset sales.

Potential asset sales more eloquently then.

On Friday this question.

But we.

Value, our Latin business, we value, our India business, we value the North America business that we think we have great strengths and great capabilities, we don't don't comment on speculation and rumors.

That are out there, but we do look at all aspects of our company and while I won't specifically comment on Latam or any other things specific other than the consumer process that we've announced we're focused on creating long term value for our shareholders and we look into the various opportunities within the context of that.

On your second question, David I think for enterprise It really is.

Installs from second quarter sales, so I think we mentioned.

Second quarter was a good sales sales quarter also for federal keep in mind, we have the federal shutdown in fourth quarter and impacted in January and February of this year, but we have strong federal sales in in March of this year and saw a lot of installs on the fed side as well.

So performance on the Feds channel and overall installs related to the cells in the enterprise business.

For idea.

It's just strength from our large customers.

Second quarter ourselves with good from from those customers and we also.

The our international business performed well as well so those are the drivers.

Got it okay. Thanks, guys.

And our next question is from the line of Mike Mccormack with Guggenheim Partners. Please go.

Hey, guys. Thanks, maybe just two quick ones Neil on the equipment revenue for the quarter I think we should be thinking about there.

And also I guess looking into Fourq, you as well and then secondly, a lot of the peers are concerned about pricing in the business marketplace around enterprise, but what do you guys sitting out there as far as spot pricing goes thanks.

So I'll take the pricing one first on then Jeff we want to add to that I think we're seeing pricing dynamic is very rational and we're not really seeing anything that would concern us now on the transaction also a side like if you think about long haul waves there are certain pockets of.

Competitive than we step away at price points that we don't like but generally most of what we see our solutions that we're having discussions with customers where prices arlo discussion, but it's not starting with price that are more focused on the overall solutions bus specific do some other examples that Jeff shared.

A lot of those are solutions that we're deploying for the customers that our products and services were up with crop professional services and although capabilities.

I think thats right I mean prices is an important point for customers.

The but we think pricing in the market is is rational and we think that we can win at the prices that are out there.

And for all other equipment perspective, I think we deemphasize like we've said before low margin equipment sales.

But we do have equipment every quarter, which is more wrapped around solutions that we're deploying and the margins that are are relatively healthy and there is not work attached to that and we see that every quarter to then there is nothing out of the ordinary there in terms of fourth quart are the only thing I would highlight is keeping.

Mine that fourth quarter last year was fairly strong we had roughly 40 million of nonrecurring revenues that we highlighted but as we say here today, we don't see anything like that.

In the fourth quarter up this year.

Great. Thank you yes.

Sure.

And our next question is from the line.

Yeah Levy from FBR. Please go ahead.

Great. Thank you.

You had prior guidance tied to expect enterprise and I am revenues to be up sequentially in the fourth quarter do you still expect that is there. Another U.S. have contribution that we need to think about.

On the expense side can you quantify maybe the seasonal expenses that you saw in the quarter going forward.

Can we expect cost cutting to continue at the pace of the topline decline.

So for idea.

Enterprise I think as I said in my prepared remarks, we have seen.

Improvement excluding you Asaf.

And we expect the same going into fourth quarter. So overall, we do expect.

You know I gave an enterprise to do better in the second half of this year relative to the first off of this year. The only thing to keep in mind as currency has been than a headwind.

In terms of your question on seasonality cost seasonality, we did see the typical increase and utilities.

In the third quarter, roughly 20 million.

And in terms of.

Cost savings over the long term, we still feel good about the 802 billion.

And we have good line outside there and our execution has been good so we feel good about that.

Okay. Thank you.

Thank you bye.

Yeah.

And our next question is from the line of Nick del Deo with Moffett Nathanson. Please go ahead.

Hi, Thanks for taking my questions.

You had a pretty substantial sequential decline in SJ. This quarter I know, there's some noise in that number based on integration costs and when there. When they are booked is there anything worth calling out behind that decline and we think that is a good.

I mean off point for Q4 and beyond.

Yes, I know, there's nothing specific to call out you know these these things are number linear so we're very milestone based.

And so.

Nothing specific to call out there might be some noise like you mentioned with with the integration cost. So there might have been some integration costs.

Last year in that kind of last quarter I'm, you end up category.

Okay, but nothing specific to pull up.

Okay. That's helpful.

And you guys have talked about an opportunity to drive SMB revenue by targeting on that buildings can you help us understand how your sizing that opportunity and when we might start to seeing impact.

Well, we don't really talked about how we size that we look at the various buildings that are out there we look at the customers gentlemanly we target.

Our network expansions with multiple factors in mind, we look at off net expense if they have off net expense, we know how much we get to say by moving that building on that and so it's a guaranteed return for us.

We look at existing customers and then we looked and and we transition those customers into our on net footprint and we can provide better service to them and then we look at potential customers and we have a pretty sophisticated targeting capability. The to look digitally at these customers to understand where they are how we're going to.

Serve them and really positioned our products for them and so we'll we'll continue to do that inside the legacy let footprint, we have a lot of opportunity outside the legacy like footprint as well.

And the.

Opportunity outside the let footprint the Jeff just mentioned.

The addressable opportunities large it really is about improving our execution and thats worth spending a lot of time in terms of fine tuning, how we go to market and how the drive better penetration there. So thats just a function of execution, we're not constrained by the market opportunity there.

Okay, Great I mean, one one quick one for Neil the 40 million sequential increase in U.S.S., how is that split between consumer and business.

Consumer is very small, it's mostly business mostly doesn't okay. Great. Thank you.

And our next question comes from the line as Philip Cusick Jpmorgan. Please go ahead.

Hi. This is we fulfill two follow ups. If I can first you talked about equipment, how far through the exit from unprofitable revenue with Centurylink today and what's the composition of that remaining revenue is it on video and second it goes and frankly Dave's question can you expand on Centurylink strategy for moving closer to the edge.

And how that Shadier influence as you're thinking about potentially monetizing non core assets on the map. Thanks.

So on the unprofitable revenue I think.

You know the best way to think about it is going forward as fairly clean is that all things around the edges you as primarily a prism. So we still have call that 30 million of prism revenues that will continue to trade away going forward, but as you think about sequential.

Performance relatively relatively clean.

But with respect to going closer to the edge fiber is the edge.

How we picked up customers, how we bring them into the network. So the fiber is the edge of the network, but we are looked when we talk about edge computing that means taking customers computing resources and moving them closer to that fiber connected adds to the closer to the place that that traffic is originated or that traffic needs.

To the terminated CDN is the same way we continue to move.

CDN resources that we have closer and closer to our customer making them closer to the as where we directly connect to the customers with the fiber infrastructure that we have.

And I hope that answers the question.

Thank you.

Okay.

Operator, I think that's the last question we have so.

I'd like to.

Before we conclude the call to summarize a few key points.

As we said and as demonstrated in our third quarter results. We expect revenue performance will be better for high Gam and enterprise comparing the second half of 2019 to the first half.

We operate what we believed to be the world's best fiber network and we will continue to focus our capital deployment on expanding our fiber footprint and providing innovative solutions over that network.

We are executing on our transformation initiatives, which improved the customer experience and increase efficiency throughout the organization.

We delivered another quarter of solid progress on our deleveraging objectives and expect to be within our leverage target in our three year timeframe.

And all of these initiatives and accomplishments are aligned to our overall guiding principle, which is to grow free cash flow for sure.

Thank you for joining today's call and for your continued support a century link operator that concludes the call.

Thank you, Jeff we would like to thank everyone for your participation and up and for using Centurylink conferencing service. Today. This does conclude the conference call. We ask that you. Please disconnect your lines and have a great day everyone.