Q4 2019 Earnings Call
Greetings and welcome to Centurylink fourth quarter and full year 2019 earnings conference call.
During the presentation, all participants will be no listen only mode.
Afterwards, we will conduct a question and answer session.
That time, if you would like to register you May proceed to one followed by the four on your telephone if at any time during the conference you need to be an operator, Please press star zero.
As a reminder, this conference is being recorded today Wednesday February 12, 2020. It is now my pleasure to turn the conference over to Valerie Finberg, Vice President Investor Relations. Please go ahead.
Thank you France.
Good afternoon, everyone and thank you for joining us for the Centurylink fourth quarter 2019 earnings call. Joining me on the call today are just storey president and Chief Executive Officer, and Neil Dove, Executive Vice President and Chief Financial Officer before we begin I'd like to call your attention to our Safe Harbor statement on slide two of our Fourq.
19 presentation, which notes at this conference call May include forward looking statements subject to certain risks and uncertainties.
In addition, we will refer to certain non-GAAP financial measures, which are reconciled to the most comparable GAAP measures.
It was reconciliations can be found in the earnings press release or the supplemental schedules on the Centurylink website.
Additionally, please note that certain metrics discussed on the call today exclude transformation costs and other special items.
Noted in our earnings materials with that I'll turn the call over to John Thank salary and thank you everyone for joining us on.
On today's call I'll provide a recap on our progress in 2019, and how we're thinking about 2020 m. beyond Neil will provide an overview of our financial results and they will go into your questions.
We made good progress in 2019, transforming and positioning our business for the future. While also delivering on our near term objective and meeting the guidance targets. We provided at the beginning of the year.
As I look back over the past two years since the close of the level three transaction simply put we have done exactly what we said we're going to do because you can see on slide four in 2018 in 2019, we met or exceeded all of the outlook measures. We provided we delivered two consecutive years of growth in adjusted.
EBITDA in two years of expanding margins.
We also exceeded our integration synergy targets in 2018 and are well on our way to achieving the de leveraging and transformation cost saving targets, we shared with you in 2019.
Just a quick significantly ramped our free cash flow from pre merger levels last year. As we said we would we grew enterprise and I am revenue in the second half of 2019 compared to the first half of 29 team. There's still a lot of work ahead, but I'm proud of the worked out our team has done and we were.
Main focused and financially disciplined as we continue to drive our transformation.
You've heard me say many times that our focuses on driving growth in both profitable revenue and free cash flow per share. Our strategy is fairly straightforward and our 2019 capital investment program focused on three primary areas enhancing our product capabilities to meet the changing technology needs.
Our customers and the digital interactions they see.
Increasing the size of our addressable market by continually expanding our fiber footprint.
And improving our customer experience and reducing our cost to operate through simplification and automation.
I'm pleased with the progress across all of these dimensions.
As an example of expanding our addressable market and 29 team, we built fiber to approximately 18000 additional enterprise buildings, bringing our total account to around 270000 fiber fed on net locations.
Prioritize fiber deployment for consumers over previous investments in copper based technologies like bonding vectoring.
We now have enabled more than 2 million fiber household a number we expect to continue to grow.
And we're making it easy easier for our consumer customers to access these networks by standardizing our product set and enabling a digital environment that digital environment allows customers to immediately initiate service using automated and seamless provisioning processes and turn this lowers our cost to operate and improve.
Our customer experience.
This type of transformation creates a virtuous cycle, we optimize our capabilities to reduce costs, which drives a better customer experience and happy customers buy more in churn less.
Beyond our capital investments, we continue to take steps to improve the profitability of Centurylink based business.
We are slowly eliminating or linear video products and shut down initiatives to create a streaming video product. We continue to groom our enterprise customer base to identify an exit low margin contracts. We have de emphasized low margin C.P.. So we're still self <unk>, but only in the context of large.
<unk> network centric and professional services deal.
These lose obviously had a negative effect on revenue does have a positive effect on free cash flow generation.
We believe the majority of this low quality revenue grooming is now behind us, but we remain disciplined with our focus on profitable revenue growth.
We're also very active in grooming low margin ausnet circuit onto our own fiber facilities, they long slow process, though.
From a pure cost perspective, we achieved 850 million in run rate integration synergies in 2018 and are well on our way to achieving the 800 million to a billion and transformation efficiencies we announced in 2019.
I will continue to streamline our operating model and believe we have significant opportunities to continue to transform centurylink in the future.
I'd like to cover one last highlight from 2019 before I discuss 2020, turning to slide five at the beginning of last year, we modified our capital allocation strategy to focus on three priorities increased capital spending to drive growth in the business as examples. The addition of the 18000.
New on that buildings I mentioned brings more customers locations on that and gives us a strategic advantage and a better customer experience investment in our edge capabilities, coupled with our deep and extensive fiber network places us at the forefront of the low latency hi transmission rate world events.
Computing.
Grading or global network with the largest deployment of ultra low loss fiber positions us well continue winning in the long haul fiber market, especially with Hyperscale customers.
Expanding our consumer fiber footprint enables growth in our high speed broadband offerings.
Lastly, as I just discussed we believe investing in the transformation of our quote to cash platforms only drives operating efficiencies, but also improves our customer experience and supports our revenue growth initiatives across all of our customer segments.
Our second objective was to reduce leverage whether tired of 2.75 to 3.25 times over three years, we reduced debt in 2019 by little more than $2 billion. In addition to leverage reduction, we're taking advantage of our improved balance sheet and strong capital markets.
To lower our cost of capital and reduce interest rate risk deal what provides additional detail, but I'm very pleased with this work and believe it should drive improved equity value overtime.
Finally, we believe our dividend as a key part of our value proposition and we returned more than a billion dollar dollars in dividends to shareholders. In 2019, we remain committed to our capital allocation strategy and in 2020, you can expect to see us continue to invest in the business for growth and further reducing.
<unk> leverage our dividend policy is unchanged, giving us what we believe is a very manageable payout ratio in the thirtys.
Turning to 2020 in slide six I'll discuss our 2020 priorities you'll notice they look a lot like our 29 to <unk> priorities, which by the way is what discipline to a plan looks like first we want to continue to transform our operations to improve both the employee experience and the customer experience second.
Well I continue to invest in growth through fiber deployment and enablement of fiber related products and services such as embedded security dynamic connections cloud application management and edge computing.
Third row, adjusted EBITDA through ongoing improvements in sales operational efficiency and financial discipline and fourth continued to progress toward our 2.75 to 3.25 leverage target.
I will cover the details of our financial outlook for 2020.
As we looked at 2020 M. beyond we expect our revenue trajectory to continue to improve what we do not expect these improvements to be linear we do expect better performance over the course of the year and we will remain disciplined in our pursuit of profitable revenue.
As you know we don't provide a forward looking outlook for revenue, but we understand the importance of growing revenue and we're very focused on that as a key objective.
Briefly walk through commentary for each of our business groups I'll start with <unk> again.
As a reminder, our international and global accounts business encompasses our operations in light of Tam EMEA and APAC as well as our global accounts team, which serves a little more than 200 customers customers, primarily based in North America, but that operate on a global scale.
These 200 customers aren't necessarily our largest customers by revenue that there needs to match, our global capabilities and they represent opportunities for growth.
The I guess business showed improvement in the second half of 29 team and we believe we can leverage our investments and market position to drive continuing improvement.
Moving to our enterprise segment, which includes both large and regional enterprises generally for companies with more than 500 employees as well as our public sector group that includes all domestic federal state local and research and education customers.
In addition to hours ubiquitous fiber network I have long been a believer that operating locally is a key differentiator our local market strategy levers is about 25 teams of general managers account managers sales engineers and sell support that are locally position in key markets across the country.
These local teams work directly with and know our customers and their markets as many of our competitors have pulled back from a local model. We have continued to lean into it creating what we believe is distinct advantage for centurylink.
This locally focused customer centered model together with our far reaching fiber network and the ability and willingness to effectively deployed capital to meet our customers communications challenges are leaving an increasing number of customers to select Centurylink.
For example, the Texas Rangers announced in 2017 that they were planning to build a new enclosed ballpark to be ready for the Twoq 2020 baseball season, a ballpark that would require a new technology designed to meet the needs of the team and the fans.
We're focused on creating a one of the kind of spirit experience for everyone at their home baseball games and additional events. They hold throughout the year. The Rangers selected Centurylink to support their smart Stadium vision based on our multiple product capabilities, including our smart venue offering professional services and hybrid.
Networking portfolio, all writing over Centurylink diverse fiber connectivity into the savings.
Looking specifically at the public sector portion of our enterprise segment highlights what I see as one of the key benefits of the combination of essentially of Centurylink and level three well both companies had a share of the federal business, we're seeing that the combined networks together with our hybrid networking another case.
Abilities have made us more competitive and are enabling us to win more new business. The neither company was able to do on its own and if I may brag a bit I also believe we have the best federal team in the business I'll give you a few points that illustrate our growing success.
After being selected as the first telecommunications provider to be awarded the authority to operate under the New Yes program. Centurylink was then awarded the very first contract underway I asked to provide core network services for NASA. We also recently announced a significant win with the department of the interior.
With a task order worth up to $1.6 billion over an 11 year period, which is even more significant as the DIY business was pretty good previously provided by a competitor.
We've also recently announced wins with the social Security administration. The Department of Defense Education activity network and the census Bureau, we're excited about these wins and we will continue to pursue growth in the public sector space, Although I do want to caution that government contracts generally takes several years to ramp.
Our success, what the federal government demonstrates what a skilled sales and support organization can do with a world class network and leading edge products as with the various government entities, we're bringing the same capabilities to our enterprise and I am customers.
Turning to SMB, we continue to see mixed results from this segment and read as revenue pressures from legacy services as far more than offsetting growth from new services and our expandable addressable market. However, we believe we can ultimately grow this segment and our investing in the products and platforms.
That are aligned to the unique needs as these customers. Our aim is to bring these customers the power of our network security and other related services by enabling platforms. The support high volume frictionless transactions and make it easier and more efficient for these customers to access our capabilities.
You can expect to see us continue to invest in fiber to multi tenant environments and focused on taking share where those investments are made.
To complement this investment and the ongoing simplification of our SMB operating model, we're streamlining while at the same time enhancing our our product portfolio. So enabled solutions tailored for the small and medium business market. This includes products like unified communications as a service embedded security and.
Simplified weighing offerings, all that are seamlessly delivered and scalable based on the individual customers needs.
As I said, we're not yet where we expect to be in the SMB segment, but I am optimistic about out about our ability to improve performance overtime.
Our outlook for the wholesale segment is largely unchanged and we continue to expect revenue to decline primarily driven by ongoing industry consolidation and technology evolution. However, technology evolution also gives us opportunities and we're working closely with our wholesale customers to support their fiveg initiatives.
As our expanding fiber footprint is a natural match, but their needs.
Within the consumer business in 2019 was somewhat of a transitional year that highlighted two areas of focus the focus on fiber as the premier last mile axis solution outside of our Caf two markets and the ramp down in our linear TV product.
We believe our strategy to invest in fiber is paying off broadband revenue grew year over year, each and every quarter in 2019, well we've seen declines in our low speed broadband subscribers, we've seen great results with our high speeds subscribers from the fourth quarter of 2018 to the fourth quarter of 2019, we doubled the.
Number of subscribers with speeds of 100, megabits or higher and nearly tripled the number of subscribers with one gig in higher.
We believe the reason for this gross is the simple fact that fiber to the home not hybrid fiber COACT not wireless not even fiveg that fiber delivers the best experience for customers and is the most scalable for future services as we all know from our own personal experience consistent Brazil.
Yes, hi bandwidth connections are essential to today's community consumers.
Finally put while fiber isn't the practical solution in all markets or all neighborhoods, we take share where we invest in fiber directly to the home.
We will continue to invest in our consumer business centered around three primary initiatives extending our fiber footprint in areas that make economic sense and ensuring we grow where we invest.
Improving our systems tools and capabilities to create a simpler digital experience for our customers and to drive efficiencies to maximize cash flow from the declining parts of the business.
And completing the Caf to build up in addition, we like the framework we've seen over the last few weeks with the art off program and believe the FCC has done an excellent job in designing a program to enable access to underserved areas. We believe art off is a natural fit with Centurylink network and the robust fiber network cap.
Polarity from our cash to physician, we will pursue participation in order to where the economics makes sense for us.
Well, we remain and enterprise centric company, we see clear value and with consumer business contributes to Centurylink by growing where we invest driving in driving efficiencies into our operating model and maximizing the contribution from the declining parts of consumer we believe we can effectively manage EBITDA and cash.
Flow contributions from this business.
I'd also like to update you on a couple of other consumer related items first you may have seen several announcements at the end of 2019 of settlements with various attorneys general regarding the consumer billing practices lawsuits as of last week, we've reached settlements with agee's in five states in the fourth quarter.
We took a $50 million charge for consumer related AG and litigation matters, we continue to maintain our marketing and billing practices were properly disclosed inconsistent with widely used industry practices, but we also saw the benefit of settling these cases to enable us to focus on continuing to improve the business.
We still have some ongoing litigation related to the consumer business, but we've made significant steps towards putting these matters behind us.
I'd also like to give you an update on our strategic review of the consumer business. During our review we had no preconceived notions or pre determined outcomes in mine there were no sacred cows. Our goal was to scrutinize the business unit and determine how we could maximize shareholder value over the long.
Turning to that end, we've engaged with parties that are interested in exploring the purchase of all or parts of the business. We also took a look at what we could do be doing better internally to drive additional value and this aspect we confirm several things we already knew.
First we can continue to approve improve efficiency in the business by simplifying our product offers and moving to a more digital experience. We believe we can improve efficiency as legacy legacy revenues decline.
Second we can more effectively penetrate our fiber fed areas, we still have opportunities within our existing fiber footprint to drive higher penetration rates and our implementing new initiatives to do so.
Third we should continue to expand our addressable market through further fiber deployment, we win where we invest in fiber fed neighborhoods fiber is appear a superior solution and we have demonstrated the ability to take share where we invest.
As I mentioned, we're focusing on fiber as our preferred access solution in the consumer broadband market. We remain open to all value enhancing opportunities and continue to engage with parties interested in transactions or partnership opportunities as we always would but our focus right now is to continue.
Due to expand our fiber footprint improve the operating model and extract cost from the business, which creates the best long term value for the company and for our shareholders under any scenario.
I will tell you that the team here sees the value in our network platforms products and and our approach to customers and we're excited about 2020, we hear from our customers that our willingness to invest our differentiated service experience and our solutions capabilities make a difference in there.
Ability to achieve their goals for 2020 of the.
We continue to invest in our fiber network to drive greater revenue from our existing fiber infrastructure and invest in simplification and automation of our business both to take out costs and to improve the customer experience.
As we execute on that strategy. We believe we will drive sustainable long term growth and 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 and the outlook for 2020 Neil.
Thank you Joe and good afternoon, everyone.
Before we get into the details will before quarter.
I wanted to provide a brief overview our financial performance for the year.
Which can be found on slide seven.
2019.
Was a solid year for essentially.
We met all our financial outlook measures, specifically adjusted EBITDA of 9.070 billion and free cash flow of 3.276 billion.
One of the full year 2019.
We expanded our adjusted EBITDA margin do 40.5% compared to 38.6% for full year 2018, which represents a more than 500 basis point improvement since the level to be transaction.
Over the course of 2019 through a series of capital market transactions, we reduced by approximately 2 billion.
Delevering to 3.7 times this quarter from four times for the same period last year.
And 4.3 times of the close of the level tweet transaction.
Over the last 12 months, we have also refinanced approximately 17 billion in long term debt.
Reducing interest expense and extending maturities.
And for the full year 2019, we achieved approximately 430 million of annualized run rate adjusted EBITDA transformation savings.
Moving to revenue for the full year 2019, So total revenue declined 4.4% to 22.4 billion.
If you looked at the year over year revenue declined for 2019, we estimate that about 25% to 30% of the decline was driven by actions. We took to focus on profitable revenue and those sales sales leaseback accounting change that we described on our fourth quarter 2000.
On 18 earnings call.
Turning to slide eight total revenue in the fourth quarter declined 3.6% to 5.57 billion.
This compares to declines of 3.6 person in the third quarter, 5.5% in the second quarter and five person in the first quarter.
As a reminder, in the fourth quarter of 2018, we highlighted that we had about 40 million in nonrecurring revenue benefit.
You are sub is up about the same amount this year compared to the fourth quarter 2018.
So as you look at the year over year person to change it as Robert is another of the underlying business.
Sequentially total revenue decreased 0.6%.
Compared to an increase of 0.5 person in the third quarter and a decline of 1.2% in the second quarter.
Also keep please keep in mind the fourth quarter is typically stronger from a seasonality perspective.
With the fourth quarter is one we usually see contract rewrites, primarily for our largest customers.
We also expect a decrease in us up rates by approximately 15% in the fourth quarter of 2020 relative to the rates in the fourth quarter 2019.
As a reminder, this as pass through revenue, we collect for the FCC.
Moving now to our business segments on a year over year basis International on global accounts or ITM revenue decreased 2.1 person.
On a constant currency basis, I again declined 1.1%.
On a sequential basis, I again grew 0.6% compared to a decline of 0.3% last quarter.
Moving to our enterprise segment.
On both the year over year and sequential basis enterprise revenue was roughly flat.
We achieved our objective.
Moving the revenue trajectory for I guess and enterprise.
Currency was a headwind, but adjusting for currency, which primarily impacts.
And excluding us up both Gam and enterprise grew revenue for the second half of the year compared to the first half.
SMB revenue decreased 3.3% year over year.
This compares to a third quarter 2019 year over year decline of 6.5%.
Sequentially revenue declined 0.4 person.
Hard to a decline of 0.3% last quarter.
Wholesale revenue decreased 7.4% year over year.
Sequentially, we saw a decline of 3% compared to an increase of 0.7% last quarter.
As a reminder, we had a benefit of 15 million from a carrier settlement in the third quarter 2019.
Excluding bets carrier settlement wholesale would have declined 1.6% sequentially in the fourth quarter.
Turning to consumer on slide nine.
For the fourth quarter 2019 revenue declined 5.5% year over year sequentially revenue decline, 0.9%, which compares to declines of 1.3% in the third quarter, 1.7% in the second quarter and 1.8% in the fourth quarter.
Broadband revenue for the fourth quarter, 2019 grew 2.1% year over year, which compares to growth of 2.3% last quarter.
In the fourth quarter, we saw a net loss of 36000 total broadband subs in speeds of 100 megawatt above we added 53000 subs.
Turning to adjusted EBITDA on Slide 10 for the fourth quarter 2019, adjusted EBITDA was 2.2, Southern 8 billion compared to 2.301 billion from the euro the quarter.
For the full year 2019, adjusted EBITDA was 9.0, southern zero billion, which compares to 9.040 billion.
For 2018.
Despite more than a billion dollars in revenue last year over year, we achieved our objective of growing full year adjusted EBITDA.
Focusing on profitable revenue in our cost transformation efforts.
For the fourth quarter 2019 capital expenditures were 940 million.
For 2019 capital expenditures were 3.6 to 8 billion.
We ramped up our capex spend by more than 450 million relative to 2018, as we focused on improving revenue trajectory.
In the fourth quarter 2019, the company generated free cash flow of 1.0 to 2 billion.
For the full year 2019, we generated.
Cash flow of 3.276 billion.
Turning to capital markets activity on slide 11.
On our fourth quarter 2018 earnings call, we outlined a three year plan to get to at target range of 2.75 to 3.25 times net debt to adjusted EBITDA.
Over the course of 2019, we have been very active in the capital markets and through a series of transactions, we decreased net debt by approximately 2 billion.
Additionally, since announcing our deleveraging plan last February we refinanced 17 billion or roughly half our debt.
Our improved credit profile and constructive market conditions have enabled us to reduce interest expense and extended maturities.
Turning to our maturity profile on slide 12.
At the end of 2018 for the five year period from 2020 through 2025.
We had approximately 26 billion of debt maturing.
As a result of our deleveraging and refinancing activities, we have reduced maturities by over 12 billion for those same period.
For the full year 2020.
We expect net cash interest expense in the range of 1.75 to 1.8 billion.
The midpoint of this range implies net cash interest expense savings of more than 200 million compared to 2019.
And more than 350 million compared to 2018.
Our net debt to adjusted EBITDA leverage ratio is now at 3.7 times and we remain highly focused on getting to our 2.75 to 3.25 net debt to adjusted EBITDA leverage target.
As of the end of the fourth quarter, we have achieved approximately 430 million of annualized run rate adjusted EBIT our transformation savings.
These savings are part of our three year transformation plan that we outlined last year.
Overall, we continue to expect to achieve the 800 million $2 billion in annualized run rate adjusted EBITDA savings.
Integration and transformation costs and special items incurred in the fourth quarter 2019 impacted adjusted EBITDA by 173 million and free cash flow by 53 million.
Turning to slide 13, and our outlook for the full year 2020.
Please note all outlook measures exclude integration and transformation expenses.
For the full year 2020, we expect adjusted EBITDA of nine to 9.2 billion.
And free cash flow of 3.12 3.4 billion.
We expect capital expenditures in the range of 3.6 to 3.9 billion.
The slight increase in our outlook relative to last year is primarily driven by increased fiber deployments for our enterprise federal and consumer customers.
In terms of notable items on working capital, we expect cash payments for other post employment benefits or OPEB of approximately $200 million.
As a reminder.
Our fourth quarter or house, typically higher working capital use driven by timing of bonus payments and other prepaid expenses.
Also important to note our free cash flow guidance does not include any discretionary contributions to the pension funds.
For 2020, we do not have any required contributions.
In summary, we concluded 2019 with strong execution on several fronts, we improved the revenue trajectory for the overall business, we delivered on EBITDA growth and margin expansion.
As we successfully balanced investing in our growth products investing in customer experience and appropriately harvesting are declining products.
In addition to interest expense savings, our deleveraging activities and capital market transactions significantly strengthened our balance sheet.
With our continued investments in the business.
Our focus on profitable growth and ongoing cost transformation initiatives, we are well positioned for 2020.
With that I'll hand, it back over to John Thanks, Neil.
It's time to open it up for questions, perhaps would you explain the process.
Thank you if you would like to register for a question. Please press Star one followed by the four on your telephone you will hear about three Tom prom to acknowledge your request. If your question has been answered and you would like to withdraw please press the one follow by industry.
Turning to our first question from the line of Simon Flannery with Morgan Stanley. Please proceed.
Hi, This is electus right from for Simon I wanted to ask could you talk a little bit about.
The impact from the large contract wins, you've been announcing another.
Kind of ramp over time.
Yes, and vague terms that you are last part of the question is exactly right they ramp overtime.
Especially with the federal government. Yes. These are were awarded multiyear contracts.
I would anticipate future services, we hit task, we get an overall task order for that but then we receive individual orders along the way and we will get them spread out over time and they'll turn up overtime. Some of the things are are more Andrew. So for example on the Twentytwenty census.
That has a timeline associated with it and but in general they ramp.
Just just over a fair amount of time.
Great and if I could ask.
Your question could you talk a little bit about churn risks or opportunities from a pending wireless mircera potential dish network build.
Sure.
Yes. If addition network builds out then we look at that is a great opportunity for us to to go when the new customer and help them soon and supported their fiveg rollout or their broadband network wireless rollout.
If you look at T mobile and spread if that.
Ultimately goes through which it looks like it will but is it good openly goes through we have great relationships with both companies were key provider to then in both companies.
Theres always upside and downside.
And their expansion into Fiveg and expansion into other markets.
Represents an upside, but we'll have to just look at it overtime, we've gotten really good at industry consolidation and winning business with our with our wholesale partners as they go out and and by other companies and so we just look at it as a as an opportunity to find where were the right solution for those providers.
And just to add to the contract question I thing just to provide a little bit of additional color. These contrives, usually have a very long tail. So from from a return perspective.
I've seen that are very good for us, but the it takes a while to ramp. So if you think about the contracts in 2020, the impact will be from a revenue perspective.
We'll be in the low tens of millions in year one of these contracts.
Thank you very much.
Our next question is from the line of Tim Horan with Oppenheimer and company. Please go ahead.
Thanks, guys congratulations on a great year.
Can you talk a little bit about the booking trends.
And little color around that and maybe related to that just to demand for fiber broadly speaking, we're seeing some incredible build outs by a lot of these hyperscale companies and others are.
Are you able to leverage a lot of your existing fiber with.
On the demand out there on a same for same for existing condo was there any other infrastructure you have thanks.
Yeah I'll take the second half of the question for first we see great demand for our fiber based services as part of part of the reason that led us to invest in the ultra low last localized overbuild as demand from Hyperscalers, and others, who need really really high capacities over.
Over the fiber and where traditional fibers.
I just couldn't do it as efficiently as the new low loss fiber and so we continue to too.
To work with them and to to partner with them and network builds but also providing them solutions and we think thats a great part of our business from a condo perspective, we sell condo from time to time or lease conduit from time to time, but it's not a big a big part of the overall business.
And on the on your question Tim on the booking trends.
Fourth quarter overall was the best sales quarter for us this year.
Largely driven by idea.
And enterprise.
But also due on on car caution unusually fourth quarter down is to be a light quarter for sales, but this quarter was very good quarter of cells, but driven by more complex larger deals, which takes a while to install.
So we're not going to see the benefit and first quarter, but more so.
Coming in and second third and fourth quarter of this year.
And are you using a competitive intensity in enterprise increase decrease or any change in competitive intensity.
No.
We've got great competitors out there that work really hard to provide for the customers.
We think we have better solution.
And we think we execute better we think our local model for enterprise customers is really really a key differentiator for US we think our high touch model for our gam customers as in our global footprint as really a differentiator for us, but ultimately we got strong competitors in the competitive intensity as high everyday it's up to us to execute.
The and I haven't seen anybody that if we execute well be to us. So it's really really asked that matters. Our performance is what determines success or not.
Thank you.
Sure.
Our next question from the line of backend Levy with CBS. Please go ahead.
Great. Thank you couple of questions first you talked about potentially impact will be rating customers in the first quarter is that on the wholesale side or is there is some component on the enterprise is there way of quantifying potentially that impact and.
Second on.
Can you talk about what's your guidance assumes in terms of incremental synergy.
Achievement this year and that may be finally cash taxes have you made really low when do you expect that to Matt.
Neil.
Okay, I was just making sure I get all parts of that.
But you on the on the retail that was just.
General statement.
In terms of seasonality, we see that every year.
Fourth quarter or tends to be strong and.
First quarter, we do have some pressures from re rates.
From our larger customers. So primarily it's not just wholesale but also I am the top end of enterprise. So they are just some seasonal weakness in the in the first quarter.
In terms of your question on savings.
Thank you.
Linear is still a good assumption, we achieved 430 million.
And we're still.
Good with the 802 billion over three years.
We're going to be very milestone based we have good line of sight.
And that's all factored into our EBITDA guidance range in terms of cash taxes, we do.
You know offsets there and it's been running lower than a 100 million.
And as we look at our annual wells.
We are good for the next few years.
Okay. Thank you.
Our next question from the line as Philip Cusick Jpmorgan. Please proceed.
Hey, guys. Thanks, Jeff that was helpful on the consumer side.
Can we assume that your strategic view sort of over and it can you expand on the potential to as you said sell or partner.
Parts of the business it sounds like you engaged but but as the focus now more internal or to those discussions continue. Thanks no. Thank you fill the discussions are continuing.
But the strategic review is over and the strategic review says here's how we should be investing in the business and here's how where we should be harvesting and and all of those types of things and regardless of whatever scenario, whether we maintained at all as a part of Centurylink, we sell part of it or we.
Partner with somebody.
Those things that we're doing now.
Drives the best long term shareholder value, regardless of whatever scenario works out and so those are the those are the things that we are focused on so I would say that the strategic review is over but we are continuing and actively engaged with partners and parties that might be interested in the transaction and we'll continue to stay engaged with them and.
And figure out if theres another way to.
To create additional shareholder value.
Okay and can you help us quantified the current.
Count of home fiber broadband available and how big do you think that could be in your footprint and anything you can do to reduce the cost of deploying that to Tom's over time.
Yes, I think we have about to 2 million fiber homes activated today fiber addressable homes today.
We continue to expand that we'll continue to expanded in the coming years I don't want I don't have a specific number for how big that can be but we're not we're not nearing the cap. It we've got a lot of room to continue to grow and even even within that 2 million homes, we've got a lot of.
Room to grow our penetration rate, we think we can do a much better job of driving the penetration rate within that 2 million homes. We think we can expand the addressable market by building out to more homes pretty pretty aggressively over the over the coming years.
And we don't see any near term cap in our ability to expand our addressable footprint.
So they'll do on Ed Yes, So I think just the only thing I'll highlight is so a big part of call. It 2025 push on the that footprint.
We added over the last.
18 months to a couple of years or so.
And so part of the reason the penetration there is still ramping and we like the penetration ramp.
Is it because some of that is relatively new deployment and so we still see a lot of opportunity.
In terms of adding homes with our micro targeting strategy Lord of the cost as low.
And then look good from a return perspective, and if you think about it I mean, doubling our hundred Meg subscribers in the quarter over the course of the last year and almost tripling. Our one gig subscribers are concerned team is doing a good job at figuring out how to where do we build fiber and how do we communicate with.
Customers in a way to give them the products and services that they want and so there were only going to get better at that.
And they've got a lot of initiatives to drive the penetration rates up.
And if I, if I can sorry.
Taking a lot here, but.
But I'm getting some questions coming in can you just help us with the the types of conversations you're having our their books out on your consumer business, all or part of it or is this sort of gradual conversations that may or may not develop over time that we shouldn't think or sort of a urgency behind them.
We've been we've been very transparent with a number of parties. We've worked closely with them we have.
Of course have in da's and other things in place I'm not going to name names that.
We we have worked very closely to give people true insight to our our consumer business.
So that they can evaluate.
There are opportunities for us to partner together do a transaction.
The character of those transactions are all across the board and the types of companies.
That we've talked to our hurt a little bit across the board too so whether its a.
Look at a particular state or look at all of the of the consumer business or some sort of joint venture I mean, we're we're open to all of those various things.
Thanks very much.
Our next question from the line of David Barden with Bank of America. Please proceed.
Hey, guys. Thanks for taking the questions.
I guess the first one Neil just as we kind of look at the cash flow guidance.
Range.
It seems like Theres, some nice tailwinds from interest savings Tailwinds from.
Maybe a pension contribution savings so I guess I wonder.
Is the is the high in the low end is the difference there the capex spending.
Given that the midpoint of the guidance is kind of pretty much consistent EBITDA with what we did a 19 I guess kind of where we will what will they understand the higher lower end. So those ranges in the moving parts there'll be helpful. And then just the second piece on.
The consumer broadband side, the could you kind of talk a little about the didnt. The ARPU difference between the lower speed that you, losing in the higher speeds that you're gaining and how the cadence of price hikes will kind of feather in over the course of 2020. Thanks.
So David I think.
On your guidance range for cash flow try to see if I can simplify that.
I think its capital in working capital. So if you start with EBITDA less capex net cash interest on our guidance floor.
Cash taxes.
And can I do the math on implied working capital, it's roughly 200 million and which is largely our open up.
You know cash spend which is in addition to what kind of flow school EBITDA. So thats. The 200 million use those while working capital and if you think about our trade working capital Dsos MDF DPL is just a day difference there good swing working capital by 100 million or so.
And on the rest cap at all in general So it's not perfect, but that's how the rough math in terms of the work and the overall free cash flow range.
Got it.
In terms of ARPU I think in general.
As we.
Our moving customers.
Up from a bandwidth standpoint, especially into gig services. The ARPU is is significantly higher.
And so that is something that we are continuing to work on and the churn rates are about our so thats going to be an ongoing.
Good for us.
Okay, great. Thanks, guys.
Our next question is from the line of Mcdowell with Moffettnathanson. Please go ahead.
Hey, Thanks for taking my questions on net to what degree is your higher expected capex in the coming year, helping to lower your opex.
On the flip side do anything initiatives, you're undertaking like edge come with a measurable up opex drag.
Yes, so first of all I appreciate the fact that I mean the question is.
Its right to the point, we do invest capital to reduce Opex that is a significant part of our strategy, we invest capital to ultimately drive free cash flow per share that on an intermediate basis improved EBITDA and so whether that comes from revenue or comes from.
Operational efficiencies we think.
We think that's that's a really good use of our of our capital I don't have an exact percentage, but that the there is a fair amount that we used to drive the operational efficiencies the digitalization of our business the tools.
And the processes that we use with our customers to drive out cost and drive up the customer experience.
Typically they're cutting like Jeff as mentioned several times I think when we invest it's a combination of improving margin margin and also drive in revenues. So just give you simple example, like when you are adding buildings to the not work.
There is.
You know off net on net savings that we're saving in terms of network expands and then there is other savings in terms of.
Operation side, and how we can troubleshoot, it's up so there's a long list of things that would that drives efficiencies.
From our.
Capital investments similarly on on the back office systems and processes as well.
But.
Any idea on on the flip side.
Any of your initiatives come with measurable upfront Opex strategy.
Yes, I mean, they do there's nothing that that is a massive opex drag, but there is if you're going to launch a business like.
Edge computing, you're going to have opex the.
Pre runs revenue and so yeah. There is some it's not material to our business I don't see it is a major overhang on us or something that we have to work really hard to overcome that you're certainly right that there is there is some operational.
Caustic sometimes.
Advance revenues.
Okay and.
And then.
Then on Jeff you describe division for the SMB platform as being a high volume and frictionless I think other words you used how far away are you from having that platform in place and generating new business.
Yeah, we're getting closer everyday.
Which is.
Maybe not.
Very fulfilling answer.
But but it's a complicated thing so let me tell you some of the stuff that we're doing that indicates that we're we're getting there and we're adding new buildings continually and those new buildings give us an addressable market with those customers.
That make it possible for us to sell to them in the first place ausnet not being a very good solution for that type of business on that really driving it. So we're doing that we're also deploying equipment in those buildings that make it easy for our operations team turned up in services on a very quick basis, because that's what we think we.
Need in that in that for those types of customers. Then we're also introducing products like you Cas and.
We are very actively rolling out SD Lan were act and with with various different platforms were actively rolling out you cast and making sure that we have the products and services all of those things go into the digital environment that we're looking for we're also updating our AR.
Back office support.
So to speak I want to be more front office than back office.
Now some of those take a little bit longer but the with a number of initiatives that we think are going to help us drive the drive the growth out of that business and really create an environment and the product set.
That meet the needs of those customers.
Got it thanks guys.
Sure.
Our next question from the line of Brett Feldman with Goldman Sachs. Please proceed.
Thanks, So you've had it a couple of quarters here you talked about this earlier in a very strong bookings in enterprise segment. It sounds like Fourq was so strong we probably should not be run rating that into the early part of this year. When we spoke speak to investors about your business. The team to think of you selling into a very hard end market with some secular pressures in it so I would hope.
And you can maybe just give us a little more context around why the bookings have have improved how much of that is stuff. You think you doing right maybe how much of it is.
Understanding of the growth opportunities available to your enterprise business in this market and maybe just some general context around the extent to which you think some of this is durable even if we're not necessarily extrapolating. The four key performance. Thank you.
Yeah. So let me let me talk about why I think we win.
And I got to list of things that go into it it's not one thing that that causes us to win but it starts with we have but I believe is the world's best fiber network, we're increasing our connectivity and then on net locations every single day, we're connected with every cloud provider.
Across the U.S., but really across the world and we have great connectivity and into them, we're creating solutions that allow our customers to manage their infrastructure more efficiently things like dynamic connections, where they can scale bandwidth up and down redirected from one provider to another from one.
Cloud provider to another cloud provider, if they want things like cloud application management, where they can look a layer higher and look at their cloud applications and how are they they running and so so I think it starts with the connectivity the fiber based high speed the low latency cotton activity, coupled with embedded security to make it a really.
Liable.
Safe environment for them, coupled with our network related services to make it easier for our customers to manage coupled with a great team and talks about our federal team that and have great. I think they are but we also have great enterprise and game teams in small and medium business teams, we have a great team going out and driving the success.
So I think that.
Our success overtime in the short term and in the long term comes down to our ability to leverage our network with great products and and make sure that we're positioning them in front of our customers properly through great sales and we're executing on delivering them through a great operation.
Ones group and so so I think it comes down to we win if we execute with the network in the services we have.
I think things like I'm, just going to fall. So do you think at the end market opportunity would allow you. If you keep executing this way to continue to grow your bookings I think after the date a lot of investors have as it is a growing pies is shrinking pie you just taking a bigger part of it.
Yeah, and its I understand the reason for the confusion because because it is a growing pie in some parts in the shrinking pie and other parts a and sometimes we get so focused on the shrinking pie, we're not paying attention to the growing pilots and that's what I think we also do differently one of the reasons I think that that.
That we're in a better position is we are one thing we are a fiber provider. We are mostly enterprise focus, but we are a fiber provider and so we look at and how do we leverage all of those capabilities so for us.
I think that yes, we have parts of our business that are declining.
But we faced the truth on those we recognize them for what they are we manage them for contribution while we have them and we lean into the growth the things that we think will grow like edge compute like.
The other cloud capabilities that I've talked about like pure bandwidth and transmission.
Rates are going to continue to go up and so so I think there I get the reason that confusion.
It's a complicated business, but overall I see better a better opportunities then.
Thank you.
But I think one thing to add to that I think it's.
Jeff kind of mentioned at several times I think if you think about.
Everything we see in terms of emerging trends, it's all about more bandwidth and less latency.
And that makes five or more and more valuable and I think what clouds. The picture like Jeff said are the legacy services saw it all the fiber based services are growing and the other thing, though we do is we have a lot of focus so competitive compared to a lot of our larger competitors that have.
Not us focused on the enterprise business like we are and we are investing in our customers.
And we're building out to a lot of their locations and enabling the transitions and if you.
When when an investor asks you that asked them about their business.
And do they need more bandwidth or less bandwidth over time do they need more locations or fewer locations over time do they need more control of their applications are less control of their applications. They need more security or less secured if you think about the fundamental trends that drive our customers. They are good for us and we see.
The opportunities across all of those.
I appreciate the color. Thank you sure. Thank you Brett and France, I think we have time for one last question.
Very well our last question is from the line of Michael Mccormack with Guggenheim. Please proceed.
Hi, guys. Thanks.
Comment on the Capex guidance, what's driving the variance there, but we'll pause it could be had one then the other of its and then secondly, I guess some consumer business for me any incentive to roll fiber faster to some of those areas. We're seeing the most loss on a modest identified thanks.
So generally our approach is very success based.
And so that's one of the reasons for the range. So we want to make sure that if we're deploying.
Five where we're deploying capacity, we're keeping up with.
With the penetration and selling into those buildings before we deploy more so that's one of the drivers are just keeping the capital more aligned.
With with revenue performance and then the two overall driver.
Is really investing in more fiber in both in enterprise.
And consumer.
And then on the are there things that the drive us into one area more than another yes. There are it's complicated.
Formula So to speak but it includes things like how much does it cost us to build what's the permitting timeframe, whether the customer penetrations what types of.
Customers do we see in there. So there are a lot of factors.
It go into and we've got.
Very smart operations research team within our consumer business that that is working on that everyday to make sure that that not only our recapturing and targeting all of the homes that we should be targeting but there were doing it in the right priority.
Great. Thanks.
Thank you very much might shape the question.
Before we in today's call I'd like to summarize a few key thoughts based on our progress into 2019 in the outlook for 2020.
We are executing well on the capital allocation plan, we announced last year, we are investing more in the business to drive growth and positioning our fiber network is the platform for delivering the solutions our customers need we made excellent progress on our.
Active to reduce leverage extend maturities and lower interest expense and as you saw our interest expense for 2020 is more than 300 million lower than we paid in 2018.
And we still returned over a billion dollars in the form of a dividend to our shareholders in 2019 for our again and business enterprise business units, we met our objective for growth in the second half of 2019 compared to the first half of 2019, and we're optimistic about 2020.
We had a solid start and our first year with our transformation initiatives, which not only improve the customer experience and increase efficiency throughout the organization they reduce our cost operate the business.
We delivered 430 million in annualized run rate savings as of the end of 2019.
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 to all of our customers. All of these initiatives and accomplishments are aligned with our overall guiding principle to grow free cash flow.
For share. Thank you for joining todays call and your interest in century link.
France that concludes the call.
Thank you we would like to thank everyone for your participation and for using the essentially links conferencing service. Today. This does conclude the conference call. We ask that you. Please disconnect your lines have agreed to everyone.
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