Q1 2020 Earnings Call
[music].
One.
Greetings and welcome to Centurylink first quarter 2020 earnings conference call.
During the presentation, all participants will be in listen only mode.
Afterwards, we will conduct a question and answer session at that time, if he would like to register for a question. Please press. The one followed by the for one of your telephone.
If at any time, you require operator assistance simply press Star Zero as a reminder, this conference is being recorded Wednesday may six 2020.
I would now like 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 first quarter 2020 earnings call. Joining me on the call today, our Jeff storey President and Chief Executive Officer, and Neil Dav Executive Vice President and Chief Financial Officer.
Before we begin I'll note that all of our earnings materials can be found on the Investor Relations section of the Centurylink Web site.
I will call your attention to our safe Harbor statement on slide two of our one Q 20 presentation, which notes at this conference call May include forward looking statements subject to certain risks and uncertainties.
All forward looking statements should be considered in conjunction with a cautionary statements on slide two.
Yeah <unk> earnings press release in the risk factors in our SEC filings, including the new cautionary statements and risk factors related to covert 19.
Today, we will be referring to certain non-GAAP financial measures, which are reconciled to the most comparable GAAP measures and can be found in our earnings press release.
Please note that effective as of the beginning of 2020, we elected to change the presentation of certain taxes related to specific revenue producing transactions, including federal and certain state U.S. F regulatory fees.
To present, all such taxes on that basis.
In addition, our one key 20 results reflect changes in customer and cost assignments among our business units.
All changes are reflected in our supplemental schedules and on today's call comparisons to prior periods reflect these changes.
Finally, certain metrics discussed on the call today exclude transformation costs and other special items as noted in our earnings materials with that I'll turn the call over to Jeff.
Thanks, Andrew Thank you everyone for joining us I hope you and your family there's things very soon in good health.
Obviously this is on a normal earnings season, what the covert 19 pandemic sweeping the nation in the world we've been through income adjusted our priorities and even our approach to the business.
Today's call I'll spend a few minutes on our first quarter results, but during the majority of my time I'll discuss the impact of covert 19 on our company and my thoughts on the industry in general.
After that Neil will provide an overview of the quarter and outlook for the rest of the year then we'll open it up to your questions.
I want to start by highlighting the incredible effort of our employees. During this crisis to support each other our customers and the communities where we live in early March we said, 75% of our employees to work from home literally overnight they implemented processes and tools.
To remain effective in the new environment and did so without missing a beat.
But not all of our employees can work from home, we've nearly 10000, a central workers, whose jobs supporting our customers and enhancing and maintaining our network requires that they continue to work from work well I'm proud of all of our employees I'm, especially proud of the work from work employees remain in the field.
And in our network control centers delivering for the emergency needs of our customers and operating our global network so effectively.
Our team has responded every obstacle with determination dedication and resiliency same characteristics they bring to their work to transform and grow our business.
I can't tell you how proud I am of our employees and I feel very fortunate to be part of this team.
For those of you on the call her shareholders. Your employees are doing a great job and I wanted to start the call with a huge thank you to all 42000 men and women around the globe.
Before I get into the details of our response to the ongoing crisis I'll make just a few comments about the quarter during the quarter, we remain focused on profitable growth.
Transformation of our service delivery platforms and cost reduction initiatives and we continue to expand adjusted EBITDA margins.
As you know at the beginning of 20 million team, we modified our capital allocation strategy to focus on investing for growth and reducing leverage while continuing to return more than a billion dollars a year to shareholders through our dividend slide four in the presentation.
We believe this was the right decision for the long term health of the business and to give us flexibility to weather future economic.
Hey environment changes as a result, our liquidity position is strong we are in a good path to reach the leverage target, we've established and we feel good about our dividend payout ratio.
Well, we are confident about our liquidity position given the difficulty in predicting the shape and timing of an economic recovery. We have withdrawn the guidance, we provided for EBITDA capex and free cash flow.
Slide five provides a summary of our response to the crisis I'll start with the measures we put in place to support our employees and how they been responding.
From the beginning we have been clear in our approach that the employee safety is our number one priority.
Well ahead of government recommendations to adopt social distancing guideline, we limited meeting sizes eliminated travel and canceled company events. Ultimately in early March we transitioned the vast majority of our staff to work from home halting the spread of the virus among our employees and the comes.
Ladies and which they live as our primary goal.
We implemented an emergency paid time off program and extended short term disability coverage to all U.S. employees to allow them directly touched by the virus greater flexibility and an increase since the financial security.
Protecting our essential employees, whether in the field or in our offices with a special focus although now resolved. Initially we were challenged to meet the ever changing recommendations for personal protective equipment.
Our principal concern was protecting employees and customers during face to face interactions as a further protective stat, we accelerated the implementation of a customer self service model, allowing a higher percentage of our customers to install and repair their own connections.
But the main thing we did to protect our technicians was to reinforce that they had full authority to make their own safety decisions. If our technicians don't feel they can perform a specific tasks thankfully. They know they have the right to say no one knows second guessing if their decision if.
You know anything about the culture and work ethic of the network Tech community will not be surprised to hear that these men and women have taken on the special challenges presented by this crisis with the same customer focus that has long been there hallmark.
Finally, we've been clear with our employees that we will be very deliberate and our plans to return to our offices that means returning to many of our locations will likely extend beyond government timelines frankly, I doubt we ever go back to the way things were before.
As a manager I always hesitant about embracing a distributed workforce, but the performance of our employees over the past two months as demonstrated that we can remain highly effective when working digitally from home.
That performance allows us to be deliberate and our return and more broad minded about how we work together in the future.
We'll take our time and accelerate our own digital transformation as we look at the future of work within Centurylink.
As proud as I am of our employees and equally proud of our customers responses to the needs of their employees and customers and communities.
Across both the public and private sectors, our customers had moved quickly to upgrade their digital infrastructure to enable distributed workforces and to meet the emergency needs as their communities.
We have seen remarkable agility across our entire customer base from insurance companies to health care providers from government agencies to financial services companies from video and audio conferencing companies to individual consumers.
We have been proud to support customers as diverse as a social security administration State farm Blue Cross Blue Shield, the Hazelden Betty Ford Clinic banner engineering and intend to Tech just to name a few.
Our customers moved quickly to increase capacity deploying more robust VPN capabilities and that security services and for our consumer customers to establish or improve the connectivity required to adapt to what we now all appreciate to be the shocking reality of working from home and home schooling.
Children.
Centurylink has taken broad steps to support these efforts, including some instances turning up conductivity in a matter of ours and extensive capacity increases for enterprise customers.
Cobot 19 will affect every aspect of our business and especially concerned about financial health of our smallest business customers. These businesses forms such a critical part of our local communities and they may lack the resources to weather disruptions of this magnitude.
For small businesses with fewer than 50 employees and our consumer customers. We've currently suspended usage limits and committed not to disconnect or charge late fees.
Recently, we extended our commitment to the Fccs Cheap America connected play through June we will continue to assess how we can help support customers need assistance to sustain themselves until the economy returns to more normal conditions.
Hi, working to support all of our customers as they work through their own challenges our actions and performance reinforces centurylink because they trusted partner I've been inspired to see how our customers have met the demands of this crisis, we should all be encouraged that the commitment energy.
Okay and creativity seen in these responses will carry us forward as we begin to reopen the economy.
We've also stepped up our community support efforts, we have donated bandwidth to frontline locations across our footprint such as the U.S.N.S. Mercy Hospital shift in California, and other temporary health care facilities across the country, we've established corporate and employee given campaigns, we will continue.
Due to seek ways to support our communities, but we believe the most important relief. We can provide is to continue to ensure our customers have the connectivity they need to respond to the demands as this crisis.
The global pandemic as highlighted an accelerated the digital transformation, we and our customers were already experiencing in how we live and work together.
But over the past two months, we've seen a step function increase in the speed of those changes.
I'm very proud of our employees and our networks ability to meet that accelerated demand.
Compared to typical traffic levels, we've seen 30% to 40% growth and internet backbone traffic and they correspondingly significant increase in average usage across our CDN and user IP voice and conferencing platforms.
Well the daily growth in traffic has leveled off over the last few weeks usage remains high or.
Not all of that growth translates to revenue as contracts often include unlimited usage, but the overall increase in traffic is a positive leading indicator for us.
The good news here is it since the Centurylink network was purpose built as a platform and capabilities to handle the growing consumption of bandwidth is brought about by digital transformation in the fourth industrial Revolution.
You've heard me talk about the benefits of fiber it is faster more secure and far more scalable than other infrastructures.
Our network is built to flex in response to in the moment traffic increases, but when those increases begin to reach beyond the limits of our ability to flex the robustness of our technology and the scope of our fiber and conduit infrastructure allows us to quickly and economically augment to handle the ever.
We're increasing demand ensuring a great experience for customers around the world.
We're also seeing changes in the way, we conduct business and an acceleration towards digital selling and customer care. However, I want to be clear, we do expect delays and decision, making from our business customers as they reassess their priorities and determine what the future of work looks like within their companies.
We believe the critical nature of our services and the renewed importance of digital transformation means this will only be a pause.
And that the K., our capabilities close relationships with customers position us well for the economic recovery.
We are watching our small business segment closely while not yet seeing an increase in churn. This is an area of concern and attention.
With our consumer customers, particularly in the early days, we received requests for speed upgrades, along with a rise in overall order volumes. This increased activity demonstrates something we've discussed before where we invest in fiber and providing higher speeds, we take share in the consumer market.
Broadband is a utility you don't want to live without these days.
However, given the rising unemployment numbers, we're watching consumer churn carefully.
The acceleration of digital transformation, driven by cope with 19 presents a wide range of opportunities for Centurylink.
Our far reaching and powerful fiber network together with services like embedded security edge computing I T enablement and managed services make us a key enabler of digital transformation across our economy in fact, virtually all of our services had been designed for the digital economy.
This crisis has reinforced the value of those services to our customers and hours response has highlighted our ability to meet their evolving needs quickly and effectively.
We believe all of this validates the value of our business going forward.
At the same time legacy Communications, then we'll continue to decline and we know we have to adapt to a lower cost more customer friendly digital support model to meet the demands of the future.
Our response to this crisis has accelerated some of those plans and later in the call Neil will discuss our progress against our transformation efficiencies.
The digital transformation is about far more than reducing cost.
It is fundamentally about eliminating the Verizon distance and enhancing how people interact both with each other and with the data. This is relevant to their businesses in lives. We believe the current crisis, along with the broader deployment of AI and machine learning the internet of things edge computing.
And the like will accelerate the March towards digital transformation and that Centurylink is well positioned to support and benefit.
To be clear, we anticipate a negative effect on our near term result.
We have seen some increased demand, but our business is ultimately only as successful as the businesses of our customers.
Nonetheless, we believe this crisis has highlighted that the services, we offer or at the very hard of the digital economy. We are financially stable investing in the capabilities, our customers need continuing to digitally transform our own customer interactions and facilitating in assisting our test.
Summers as they seek to realize the benefits from these ongoing technology trends.
I'll now turn the call overdone Neal to provide an update on our detailed financial results and our revised outlook for 2020 Neil.
Thank you, Josh and good afternoon, everyone.
I wish you all good helping these difficult times.
Before we get into the details of the quarter discussion of how cool with 19 is impacting the business.
I'll provide a few high level remarks.
For Oh.
Our liquidity position is strong and we are confident about our ability to manage through this crisis.
As we navigate these uncertain times.
We are pleased with the capital market actions, we took over the last year.
To position.
The business for the long term.
Although we could have number in vision dependent.
The current situation.
Our underlines the resilience of our long term approach to capital allocation.
We are exiting the fourth quarter well position.
We continue investing in the business, Delaware and support our dividend policy.
Second we saw continued improvement in our overall revenue performance in expansion in adjusted EBITDA margins this quarter.
While we expect to see revenue pressure given kobin 19.
And related economic forecasts.
We are fortunate to have the divorce revenue base by industry geography and customer size.
Third.
The changes we've already seen on how we live work and interact with each other.
I like the importance of the services, we offer and where we are investing.
We believe this crisis validates our strategy.
And we are continuing to invest in these essential services and our operational and digital transformation.
Oh rubber.
As we look at the remainder of the year.
We do expect to see pressure on both revenue.
And the speed with which we continue to take costs out of the business as a result of Kogan 19.
With the current uncertainty, particularly as it relates to timing for an economic recovery.
We are withdrawing our full year 2020 financial outlook for adjusted EBITDA free cash flow and capital expenditures.
Given our confidence in our liquidity position.
And focus on free cash flow.
We have reaffirmed our deleveraging target and current dividend policy.
Moving now to our first quarter results on slide six Oh, followed a couple of things.
We saw an improvement in our revenue trajectory this quarter.
And we made additional progress on our cost transformation initiatives.
We are now at 510 million of annualized run rate adjusted EBITDA savings.
We expanded margins by more than 100 basis points compared to the year ago corridor to 42.9%.
We continue to improve our maturity profile and exited the quarter in a strong liquidity position.
Turning to slide southern.
Our revenue is largely recurring from a well diversified customer base.
Which will help us manage through this economic side.
Although some of our customers will be highly impacted by the pandemics.
We believe.
The connectivity services, we provide are critical to their operations.
The industries, we expect to be highly impacted.
As defined on this slide.
Represent about a billion in analyzed revenue or approximately 5% of total revenue.
As we look across the business.
We believe the largest area of risk is the SMB business unit.
So far we haven't seen any significant lengthening of SMB receivables.
As we consider the risk within the business unit I'll note.
On an annualized basis, approximately 250 million or less than 10% of revenue in our SMB channel are from highly impacted industries.
In terms of customer size.
Customers with less than 50 employees represent approximately 1.6 billion oak annualized revenues.
Turning to first quarter revenue results on slide deck.
On a year over year basis.
For the first quarter 2020.
Total revenue declined 3.7% to 5.2 billion.
Compared to 5.1 person in the first quarter of 2019.
We have seen steady improvement in our revenue trajectory over the last few quarters.
Sequentially.
Total revenue declined 1.5 with Sun, but to a decline of 2.2% in the first quarter 2019.
Moving to slide nine and revenue by business segment.
On a year over year basis, you know national and global accounts or I am revenue was roughly flat and grew 1.3% on a constant currency basis.
This compares to a decline of 4.7% in the first quarter 2019.
On a sequential basis.
Hi, Jim declined 0.6% on both reported and constant currency basis.
Compared to a decline of 3.5% in the first quarter 2019.
Moving to our enterprise segment on a year over year basis revenue decreased 0.4% year over year.
This compares to a decline of 2.1 person in the first quarter 2019.
On a sequential basis.
No price decline, 1% compared to a decline of 2.4 person in the first quarter 2019.
Which is the typical seasonality we see in the first quarter of each year.
In the short term for both IDN and enterprise.
We expect a.
The demand impact from cancellation of live events and customers deferring major not works buying decisions.
However.
Well no remain strong and the team.
From current customer conversations has been a delay of around 60 to 90 days.
But with no fundamental change in long term demand for our services.
In fact.
Several of our customers are evaluating accelerating their own digital transformation.
Which we expect to be a benefit over the long term.
Oh, so be revenue decreased 6% year over year.
Aligned with the average year over year decline of 6.5% in 2019.
Primarily driven by continued declines in legacy voice services.
As we look at SMB for the remainder of the year as I mentioned earlier. This is an area of concern.
We are working closely with these customers as they are critical.
Not only do Centurylink, but the entire you us economy.
Thus far we have not seen a material change in churn well we are closely monitoring the situation.
It is also important to note that SMB is an opportunity for us and we will continue to focus on increasing market share in our on that buildings.
Wholesale revenue decreased 7% year over year. This compares to a decline of 6.1% in the first quarter 2019.
Sequentially.
We saw a decline of 2.5% compared to a decline of 3.3 person in the fourth quarter 2019.
With respect to whole. So just as we are doing we expect customers. In this segment will continue to optimize spending with other vendors in this environment.
Which may put pressure on revenue in the coming quarters.
Additionally, as many of their enterprise customers do for buying decisions.
We would expect to see the second order impact.
Turning to consumer on slide chat.
For the fourth quarter 2019 revenue declined 5.8% year over year.
Primarily driven by legacy voice revenue.
Broadband revenue for the first quarter 2020 was flat year over year.
We continue to focus on improving broadband revenue performance by our targeted fiber investments and driving up penetration of our competitive assets.
In the fourth quarter, we saw a net loss of 11000 total broadband subs in speeds of 100 Magna Bob.
We added 60000 subs.
From a consumer standpoint.
As work from home began to ramp we saw an immediate increase in new orders and request for speed upgrades.
Within the context of social distancing our field technicians are doing a good job keeping up with order volumes.
As we recover from Kobin 19.
We don't expect the pendulum to swing back all the way.
Positioning us well for the long terms at this point, we haven't seen a material increase in overall churn accounts receivable or bad debt.
Turning to adjusted EBITDA on Slide 11.
For the first quarter 2020.
Adjusted EBITDA was 2.243 billion compared to 2.262 billion.
In the fourth quarter 2019.
We continue to expand adjusted EBITDA margins during the quarter, which grew to 42.9% compared to 41, when 70% in the year ago portal.
Despite a year over year revenue decline of approximately 200 million this quarter. Our adjusted EBITDA was relatively stable as we focused on cost transformation and profitable revenue growth.
Regarding the Kogut impact.
We saw pluses and minuses during the first quarter.
These items are hard to quantify but we believe the net impact is a slight negative to first quarter 2020 adjusted EBITDA.
Primarily driven by reduced activity in the last two to three weeks of March.
In terms of bad debt expense at the beginning of the year, we adopted S. C 26.
This time, we have not seen any changes to any of our metrics and it's not accurately predict with any certainty.
Oh, the changing economic environment will impact our overall bad debt.
We did not increase our bad debt reserves in the first quarter 2020.
Well, we do expect to see an increase in bad debt, specifically in our SMB and consumer segments.
And we'll have more to say on our second quarter.
Earnings call.
[noise] that a little bit ended the first quarter.
We achieved approximately 510 million of annualized run rate adjusted EBIT, our transformation savings.
However.
Social distancing in prioritization of other critical activities did impact the pace of our cost transformation efforts.
And are expected to continue to impact some of our initiatives in the near term.
For example, we are experiencing delays in real estate site exits and off net you on that migrations as our customers are working from home or are focused on their own responses to cobot 19.
We remain confident in our three year transformation plans.
The opportunities have not changed and we continue to expect we achieved the 800 million $2 billion in annualized run rate adjusted EBITDA savings.
We expect to accelerate as the current situation improves.
Integration and transformation costs and special items incurred in the first quarter 2019.
Impacted adjusted EBITDA by 34 million and free cash flow by 82 million.
For the fourth quarter 2020 capital expenditures were 974 million. This compares to first quarter 2019, Capex of 931 million.
We increased our capex spend as we prepare for the cobot 19 crisis by investing in inventory in the event of the knee supply chain disruptions.
However to date, we have not seen disruptions for network equipment.
Given the environments, we are going to be very measured.
In terms of how we spend the capital generally speaking our capex spending a success based going forward.
We are ensuring that capital spending is well aligned with sales and volume growth on the not work.
We may reduce spending in certain areas in the near term suggest buildings that are predominantly driven by SMB or other high risk demand.
We are continuing to invest through this uncertain time.
Primarily in long life assets like fiber.
Are we see predictable returns.
In the fourth quarter 2020, the company generated free cash flow of 407 million.
This compares to free cash flow of 315 million in the year about quarter.
This year.
Consistent with prior years, we saw higher use of cash in the fourth quarter due to higher working capital.
Associated with annual bonus payments.
Prepayments on maintenance contracts and payroll taxes.
The growth in free cash flow was driven by improvements in net cash interest.
And as a function of our de leveraging plants.
Turning to capital markets activity on slide 12.
As we mentioned on the fourth quarter earnings calls, we completed 10 billion.
In the refinancings in January of this year.
In addition, we completed over 90 million of open market purchases in March.
And subsequent to the close of the quarter, we paid down 1 billion of debt maturity.
As you can see on slide 13, we have very little in maturities in the near term.
I wanted to take a moment and touch on our pension fund.
A year on 2019, the funded status of our pension was 86%.
We generally report our pension funded styles only on an annual basis. However, given current conditions, we are providing an update as of the end of the first quarter.
Exiting the first quarter, our funding status was approximately 83%.
We have significantly de risked the plan over the past 18 months and are pleased with our position.
Particularly given current market performance and volatility.
As we mentioned on our fourth quarter 2019 earnings calls there are no funding requirements in the near term.
Let's now move to a discussion of our financial outlook for the remainder of the year on slide 14.
The current situation brings several layers of uncertainty.
It is hard to predict when the economy will recover or one enterprises will return to predictable buying patterns.
Over the long term.
Our ability to work effectively with our customers is the primary indicator of growth.
In the short term, we do believe the economy will affect the behavior of our customers.
With that in mind, we do not believe that we are able to estimate the full year financial impact a little bit 19, with reasonable accuracy and our withdrawing our full year 2020 financial outlook for adjusted EBITDA free cash flow and capital expenditures at this time.
All other measures remain unchanged.
To summarize.
Our revenue base is diversified and largely recurring.
And the surface as we sell are essential to our customers.
Given the tough decisions, we made regarding capital allocation last year.
We have the ability to invest in growth through this cycle.
Our balance sheet and liquidity position are strong.
With respect to the dividend.
We modeled multiple downside scenarios and under all scenarios, we expect our payout ratio to remain in the authorities as a percentage of free cash flow.
As such we remain comfortable with our dividend policy.
Finally.
We remain committed to our target leverage range of 2.75 to 3.25 times net debt to adjusted EBITDA.
However, it may take us a quarter or to longer than originally planned.
Before I wrap up I'd like to express my gratitude.
Our employees, who have been performing extremely well during this been damage.
With that we'll open it up for your questions.
Brands.
Do you please explain process.
Thank you if you would like to make just your first question. Please press them one by the Florida, and California, you, we hear in three to like not only to me.
If your question has entered and he would like you with John Please press the button on the plane.
And our first question well be from the line is Kims, Iran.
Income from <unk>. Please go ahead.
Thanks, guys aware about almost halfway through the second quarter I know, there's a million puts and takes but can you give us some color on you know how the revenue trend. So far this quarter. It doesn't sound like its chains are real off from the first quarter or maybe you know some areas you're seeing some strength.
It doesn't sound like you've seen you know you're trying to weakness yet and then secondly, Jeff do you think they got the federal government might take this opportunity of cobot to kind of come up with a more.
Nationwide U.S. that plan for broadband that's that's more comprehensive at this point.
Any thoughts and that would be helpful. Thanks.
Yeah, Let me let me take that question first.
I don't know, we're working closely with the FCC I do know that they.
Or you know working on their auctions for cats additional kind of.
Type capabilities, the arda auctions that HM whether they go beyond that or not we don't know yet, but we'll continue working with them and and see if there are opportunities because I do know a that the FCC recognizes the value of broadband recognizes the probably a lot of companies are going to shift to more.
Work from home in the future and the distribution broadband needs to be pretty broad to enable that.
[laughter].
Question on the revenue trends is very similar to what I mentioned, so when you look at high again in the enterprise customers, they're really focused right now still on what they need to do in terms of their own covert responses. So it's been really not work.
Upgrades, enabling the our employees to work from home.
Increasing capacity into their data centers.
So so we're supporting all of those initiatives.
In terms of new projects broadly defined.
I think a funnel still strong and so the fundamental demand picture hasn't changed.
The general conversation tone has been kind of 60 to 90 day type a delay.
And SMB, we're still seeing cells, but light or levels than we did in March.
And we haven't seen any pickup Sean.
Thanks.
Hi, next question and I know that cannot be missing you'd be <unk>. Please proceed.
Great. Thank you I appreciate that there's a lot of uncertainty, but can you give us a little bit more color on how to think about revenue pressure versus cost cutting opportunity because I guess the dividend policy each staying around a 30% pay out kind of set does speak actually.
It's going to remain 2.7 to 3 billion range can you help us understand it was that in terms of potential to continue to cut cost offset some of that revenue pressure and maybe just a follow up on I send me.
Do we have a sense of how many of their customers took to keep up I kind of connected pledge and our non paying customers right now.
Thank you.
It's all start with your revenue Crusher question body I like you said, it's there's lot of uncertainty right now, but but a couple things to keep in mind. One is we're largely recurring revenue business.
And the services that we provide.
Really critical to their customers. So even if you think about SMB and you think about connectivity.
Lot of the services, we provide our supporting point ourselves systems security cameras things like that critical to their operations. So it's still early days. So if you think about cost reductions that these businesses have undertaken has been around reducing headcount, but the infrastructure is.
Still in place.
So the revenue is hard to tell on the cost transformation side.
The the delays we've had our more around you know where our.
Social distancing is an issue.
But as things tend to improve will accelerate our cost transformation. So we have a lot of a lot worse, there, but like you know that in the near term like just emphasize we have the financial flexibility to do the right things to support our customers to the right things to support our employees. So.
We will have the financial impact in the near term.
But we have a lot of lovers, a by the time, we get to free cash flow and so we'll be managing costs tightly will be calibrating, our capital, although we'll be investing will be calibrating, our capital to demand and sales and we feel pretty good at the free cash flow level and <unk>.
Like I mentioned the models the scenarios, we've modeled occur all of them.
Ardent authorities in terms of dividend being up that as a percent of your free cash flow.
Got it you you've been listening to these calls for a long time and you've heard me say that that our ability to win is based on our ability to execute not the macroeconomic environment as the market. That's the different this time the market does dictate the.
[noise] to some extent the timing of our ability to win the what we've seen is our customers need our products and services more than now more than ever that are relevant they're capable products and services to meet their challenges we've done a great job of executing and delivering for those those cuts.
Summers and I've gotten a number of emails affirmed Ceos and department had a thanking me for poor where we've been able to do and very short periods of time and so so we do there's a lot of uncertainty, but it's not long term uncertainty its short term uncertainty what is the shape of the recovery curve.
Look like when do we get started and some of that affects.
Our capital deployment and that our our cost savings. So for example on capital getting permits and can hotel rooms for construction crews and that.
Type of thing in our rural environment with Cat build out.
If you look at our our cost savings initiatives that are affected by this things like converting off net to on that where our customers aren't in their offices, we can't convert them off that on that when they're not they're in so until some of those things clear up the visibility is a little bit hard.
But there's nothing about this is it has a than anything other than reinforce.
That the products and services, we have our exactly where our customers are headed and exactly what they need.
Thank you that's helpful any sense for the non paying customer accounts since the plant.
You know, we haven't really seen any lengthening all they already so it's really early days I'm. So we track that on a daily basis.
And so far I would say its would then.
You know the variations, we see those as usual, but we know it's gonna be it's going to becoming a but it's still early days.
Okay. Thank you.
Our next question comes online and David Byrne with Bank of America needs.
Hey, guys.
Angela.
Good morning. Thanks, so much for taking the question I believe I may Oh, sorry could you quantify any impact to cultivate related shut down may have on transformation cost reduction plan or is this more of a timing issue and could you talk more to the cadence returning to our normal cost reduction glide path.
And I have two more.
So you know the overall target that we provided from a cost transformation for spot of $802 billion and lease up three years of the time, we announced that we feel very good about that so the opportunity hasn't changed and Ah you know.
Our line of sight to those reductions haven't changed it's just a delay in the interim so as we kind of work to some of the physical distancing distancing issues. So no issues from from that perspective.
Okay got it and what are your thoughts around long term potential cost savings for the business then the function of sort of coal that related learning for example, working from home from employees optimizing real estate in terms that are headquartered officers and call center and et cetera.
So that's a great questions that were looking at it right now so as we think about total cost for per employee.
We're taking a harder look at.
Okay real estate for instance, how weekend shrink the amount of 'em space that we need.
And so if you look at the total cost and you know connectivity is relatively cheap compared to commercial real estate and so we'll be evaluating that and I think all businesses will do the same.
Thank you so much and then just last one how that's now been affected by covering related stay at home measure and do you see the evolving as we go through recession and consistently across various events division.
So for fourth quarter.
Given the impact was only a couple of weeks.
And for some of the regions that we operate and some of the markets like I'm, you know Seattle and San Francisco Bay area might have been a little longer.
Ourselves, we're still up.
Year over year before I am in the enterprise so relatively small time period in terms of day.
Of the impact.
But it for a second quarter, it's too early to tell and I'm. So we'll continue to monitor that [noise].
Thanks kind of course.
Our next question from the line of Frank Louthan with Raymond James. Please go ahead.
Hey, guys. This is Rob on for Frank Hope, everyone families or stay healthy and safe throughout all of this I had a question are there any business line that you guys might look to exit if they start to weaken during the recession and then to what extent do you think you might need to do workforce reductions. Thank you.
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Well, we always look at all aspects of our business since they are there things that we should should exit or should we be.
Be acquiring we don't see anything right now as a result of a recession that.
I would lead us to exit any particular business fine well keep an open mind to pay attention to it but the don't see anything today.
And on your second question on you know reductions that's been an ongoing process for us we've been fact slowed down in the interim.
But that's part of our overall cost transformation initiative and it really is a function of resource allocation ship from legacy products, which are declining so were rightsizing the cost structure, there and we're adding in areas, where we're investing.
But nothing that our headcount is going down and we'll continue to go down.
Great. Thank you.
Our next question from the line that Philip Cusick the JP Morgan please begin.
Hey, this is that this is read thanks for taking my question, maybe maybe two quick ones recognizing the guys that pulled that the capex and once you focused on inventory, which would you update us on any progress the fiber deployment effort made in the first two months of the quarter and and you touched on permitting but.
On the flip side it have the shelter in place rules provided any kind of opportunity to proceed with construction a little more quickly maybe pull it forward. Thank you.
Yes, we haven't heard of any real opportunities pull things forward.
Person from a construction perspective.
Yeah. It really is just the can we get hotels in rural areas can we get permits in urban areas. How do we how do we continue to to extend the footprint. We are continuing to extend the footprint in the first quarter for our enterprise customers. We continued to add buildings I think we're somewhere around <unk>.
4500 build things, that's probably something that we will slow down in.
In the coming month as part of our.
Looking in waiting and seeing what happens with small and medium enterprise customers. So we'll continue to pay close attention to it but we didnt have any mark to performance declines in our ability to had buildings from a consumer perspective, we are very serious about investing fiber to too.
Through our micro targeting strategy that we've talked about before and its successful we want to invest fiber, where we can afford to do so and wherever reinvest fiber, we grow and we drive penetration that so we'll continue to do that overall, we're fiber company, we've continued to invest capital to expand.
And augment the fiber network more locations take better use of edge computing, all the different trends that we see in market.
Just to add to that problem on consumer builds.
We were a little over a 2 million units of the ended the year, where now at about 2.1.
Helpful. Thank you.
Our next question from the line as Nick a done deal with Moffettnathanson. Please proceed.
Hey, Thanks for taking my questions acknowledging that the they're going to be some timing issues for the reasons that you laid out.
Generally speaking do you expect they'll take costs out of the business at a pace consistent with the revenue declined human experience already being a bit a challenging to accomplish that.
Well like there's lot of uncertainty around the revenue trajectory. So it's really hard to answer that because we don't know what the revenue trajectory is gonna look like and we're managing the business for the long term.
So if we can go faster without compromising anything in terms of our long term shrouded you absolutely well well, we're gonna be measured about it. So we're really going to focus on our objectives that we have one across transformation side, a big byproduct with Jeff you your job.
Talk about all the time is improving customer experience and along those lines. If we can accelerate we wall, but we wouldn't want to do anything that that in pairs our ability.
To grow.
The situation improves.
Okay understood and then you know Neil you also commented that you're gonna metering measured with capital spending.
Can you help us get a bit of a better sense for how much you could flex it if need be.
What's share his success based what share relates to longer term discretionary projects maintenance so on.
So when it comes to capital I'd make the exact same comments that I just made on on the cost side. So there's always tradeoffs in terms of are you run the not work how much capacity you have yeah that ties into your customer experience reliability et cetera.
But volumes are down then we'll cut back if there are areas.
Are we question the predictability of the returns to them, we're going to come back a cut back.
If we see for consumer that were not ramping our penetration in the way that we would like then we will cut back but the key point is we have a lot of lovers.
And we're gonna be very very success based about it.
Okay got it thank you.
Our next question from the line of James Ratcliffe and Evercore ISI. Please go ahead.
Hi, Thanks for taking the question.
Gives an idea that on balance.
How does lower across the board lower customer activity affect revenue.
[laughter] me wassa or delay of opportunity versus customers not taking actions that could be churn or pricing negotiations metro. So just give us an idea that they'll be helpful. Thank you.
Yeah, so customers the customer delays affect us in several ways, one one type of delay that that.
We expect to see I haven't seen a bunch of yet, but we expect to see his customer delaying buying decisions reengineering the network reengineering their plans understanding where they're taking their business as a result, because no because the.
Crisis, and making sure that their networking plans and.
And computing plans match match, the new targeted what they're trying to build to suit, we'll see that type with the way when we are seeing a little bit more right now it's customer delay on installs because they don't have people in the offices to turn up capacity in turn up services. So we're seeing customers mine.
Generally these are not major impacts to our business, but that's the type could delay that we're seeing currently.
Great. Thank you.
Our next question is from the line of Mike Mccormack with Guggenheim Partners. Please go ahead.
Hey, guys. Thanks, maybe just a quick comment that Jeff for Neil just don't need overall landscape out there for assets. It seems like obviously, we've got a.
Two other companies that or any kind of kind of solar business. It's your consumer business that are in bankruptcy is there opportunity out there to be picking up assets that might be attractive for you guys.
Well, we don't comment on particular opportunities one way or the out.
We're in Acquisitive company and we have we had been in the past and I expect we'll continue to be so.
My my preference is to.
Acquire companies that are.
Providing a capability that we don't have that we need and so we'll continue to look at has all of those but but they're also synergies that you can pick up by acquiring companies and so we will look at but some of the company's you you you would think of.
Out there and continue to focus on does it make sense for Centurylink are not opposed to my not necessarily I'm leaning into the we do we will make sure that revoking stay abreast of all the different opportunities.
Thanks, Jeff.
I think we have time for <unk>.
One more question no no questions left or right.
Well, let me do a quick wrapped up and close the call with a few times.
Well, we're still in the early days in there a lot of unknowns and one thing I feel certain.
Is that the demand for fiber and for the services. We provide are more important than ever I've said. This couple of times on the call Centurylink, though also rise to the challenge to meet customer needs and we've seen that instate over the last two two months. So very very pleased with with how we've been performing.
[noise] covered 19 is accelerating the digital transformation efforts both of ours and our customers and so we'll continue to see our network related services are critical to supporting those afterwards.
Our actions last year to shift our capital allocation strategy and focus capital on de leveraging and investing in the business in place Centurylink in a strong financial position with ample liquidity comfortable payout ratios and management manageable maturities for the next few years.
Even in the midst of so much uncertainty, we believe we're well positioned to weather the near term financial impacts coated and to take advantage of the ongoing digital transformation to drive long term growth in free cash flow pressure.
Normally in with a focus on our free cash flow crusher today I'll close by repeating what I said it beginning in the call I'm very proud of our employees and we will continue to keep your health and safety is our top priority.
Thank you for joining today's call and for your interest in Centurylink.
Operator that concludes the call.
Thank you people would like to thank everyone for your participation and for using the Centurylink conferencing services today.
This does conclude the conference call. Thank you for your participation and ask that you. Please disconnect your lines have any tamping line.
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