Q2 2019 Earnings Call
Greetings and welcome to Centurylink second quarter 2019 earnings Conference call.
During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time, if you would like to register for a question. Please press. The one followed by the four on your telephone if at any time during the conference you need to reach an operator simply press star zero.
As a reminder, this conference is being recorded today Wednesday August seven 2019.
It is now my pleasure to turn the conference over to Valerie Finberg, Vice President of Investor Relations. Please go ahead salary.
Thank you Fran.
Good afternoon, everyone and thank you for joining us for the Centurylink second quarter 2019 earnings call.
With us on the call today are Jeff storey President and Chief Executive Officer, Neil Downey, Executive Vice President and Chief Financial Officer.
Before we get started I need to call your attention to our safe Harbor statement on slide two of our two Q1 9 presentation, which note that this conference call May include forward looking statements are subject to risks and uncertainties.
In addition, we will refer to certain non-GAAP financial measures, which are reconciled to the most comparable GAAP measures.
Those reconciliations can be found in our earnings press release or our supplemental schedule.
Additionally, please note that certain metrics discussed on the call today exclude transformation costs and other special items as noted in our earnings materials with that I'll turn the call over to Jack Thanks, Valerie and thank you to everyone for joining us.
On today's call I'll give you an update on the state of the business New will provide an overview of the quarter's financial results and then we'll go directly to your questions [laughter] I'll start by saying during the quarter, we continue to improve our customer experience increased our business in wholesale sales sequentially and expanded our adjusted EBITDA margins to 40.7%.
The quarter's results continue to validate a core tenet centurylink.
By delivering outstanding products over a world class infrastructure with a primary focus on operational excellence, we can drive revenue margin expansion and bottom line profitability.
Well, we have a long way to go to simplify and streamline our internal operations and our customer interactions with Centurylink, we certainly see the tangible results of our efforts that benefit both customers and shareholders.
Since the close of the level three acquisition, our adjusted EBITDA margins have expanded by more than 500 basis points and as we said previously we already have identified 800 million to a billion in run rate transformation savings as of the end of the second quarter, our transformation initiatives delivered annualized run rate savings of 290 million and we believe our results validate our ongoing ability to find capture and generate savings while focusing on profitable revenue growth.
During the quarter, we made good progress on our de leveraging objectives and our leverage ratio of net debt to adjusted EBITDA is now 3.8 times, we feel confident in our ability to meet our leverage target of 2.75 to 3.25 times within the next three years.
From a revenue perspective, while year over year total revenue declines increased slightly we saw improvement in sequential total revenue performance. We also saw improved revenue performance and I again and enterprise both year over year and sequentially.
Well, you've heard me say before that progress is never linear given the leading indicators and service delivery sales and our sales funnel. We continue to expect revenue for I gaming enterprise to be higher in the second half of this year compared to the first half.
I've mentioned on previous calls that we're investing to meet our customers growing and evolving needs Centurylink has what I believe to be the world's best most scalable and efficient fiber network. However, we continue investing and working hard to expand our infrastructure broaden our service capabilities and create a better digital experience for our customers and our employees.
We also recognized that our customers needs are continually evolving as technology advancements drive changes within their operating models.
I thought I'd give you a few recent examples that illustrate where we see the market going and how we are investing to drive growth in our business.
As I mentioned last quarter, we added 4500, new fiber fed buildings to our on net footprint in the first quarter of 2019.
We continued that focus in the second quarter with the addition of approximately 5000, new fiber fed buildings.
For contrast level three used to add something closer to 500 buildings per quarter. So I want to emphasize expanding our fiber footprint is a major area of focus for us.
We know that when we have a building on net our fiber based services provide a better more reliable and higher margin solutions and competing infrastructure fiber beats twisted pair copper it'd be tibor Tibor co ax and it beats wireless whether thats fiveg or not fiber wind.
It's highly flexible and increasing speeds it is secure and really as the basis for all the other competing technologies. We just do one thing differently, we take fiber all the way to the customer and customers always want fiber when they can get it.
You can expect us to continue investing to extend the reach of our access fiber network.
Beyond just being a superior technology, though fiber is well suited to meet the demands of emerging opportunities driven by artificial intelligence machine learning and big data applications fiber based solutions are better able to satisfy what we see as four key market trends.
The need for highly scalable capacity now ranging into multi gigabits per second.
The need for connecting an increasing number of widely distributed locations the need for the network itself to protect the privacy and security of our customers and finally, the need to move bandwidth intensive computing resources closer and closer to the edge to reduce latency and unnecessary backhaul of traffic.
Expanding our on net building footprint certainly helps us meet these needs, but we've implemented a number of other initiatives to ensure centurylink maintains our position as the premier fiber based provider for enterprise customers.
Turning to slide four in our presentation last quarter, we showed a similar map illustrating our north American subsea fiber routes. This is a unique asset and as I said earlier, we believe it represents the world's most scalable and efficient fiber network. However, we are further augmenting our capabilities.
We also own an extensive and unparalleled conduit system that we leveraged to bring the latest generation fiber capabilities.
To market with extraordinary speed and economic efficiency.
Each of the long haul networks, we've acquired level three quest will tell broad wing all had multi conduit built within the level three network alone. We've built 12 conduits to ensure we had sufficient space to grow and evolve as capacity in fiber technology evolved.
Most of those conduits are still available for further network augmentation, but we've also interconnect that all of those conduits systems to cherry pick the shortest and lowest latency pads across the country.
As illustrated on slide five we recently announced the deployment of Corning's latest generation of ultra low loss fiber to build the world's best most scalable optical infrastructure.
This new technology enables higher capacity and more efficient optical design than earlier fiber technologies.
Coupled with the selecting the shortest physical path between any two endpoints. We also improve latency significantly which is a key factor for hyperscalers bandwidth intensive enterprises and dark fiber customers.
We've completed three and a half million miles of our current plan to build a total of 4.7 million fiber miles with ultra low loss five or roughly 75%.
We continue to see demand for additional routes and we'll consider those to meet future customer needs.
We recognize that access and long haul transport only part of the solution. There is increasing demand for computing capabilities at the edge of the network and we believe we are uniquely positioned to capitalize on this market opportunity.
In addition to our fire far reaching fiber network, we operate a large number of edge locations that are well suited to enable edge computing.
In the coming weeks, we expect to announce the details of our investments in our widely distributed distributed and extremely well connected edge computing infrastructure.
Let me give you a specific example from a customer.
Of what fiber based edge computing capabilities can mean for them slide six shows an actual customer with close to 2000 nationwide locations. We are working with this customer to evaluate the effectiveness of our edge computing solutions to more efficiently run applications and process huge amounts of data very close to the origin of that data.
On this slide you can see that our existing infrastructure is positioned within five milliseconds transport time for 95% of that their sites.
This means that the customers applications and data can be process more efficiently from 100, or so of our edge locations rather than processed on premise at 2000 separate sites, even worse with the customer or backhaul to a central location.
In addition, our dynamic networking capabilities can provide real time network provisioning from the customer premise to our edge and then on two major cloud service providers.
This example, this for a specific customer but the results are indicative of what we see from other customers are currently working with.
This application can be an important solution for retail banking and really anyone that has a number of disperse service locations the need to process large amounts of data in real time.
The combination of our fiber network with edge computing infrastructure and managed services support is a very powerful and differentiated service offering.
We're not suggesting that its computing will eliminate the need for today's hybrid computing or hybrid networking to the contrary our customers will continue to build and operate their own data centers will continue to move compute resources to public data centers and specific applications to cloud service providers.
Our customers want to dynamically manage their network and put different types of workloads in different environments.
Through our wide array of hybrid networking solutions Centurylink provides the flexibility to do so easily.
Centurylink enables this flexibility with services like dynamic connections, which allows us our customers to make instantaneous changes to their network capacity and configuration and our cloud application manager, which allows customers to manage their applications across hybrid hybrid cloud environments through a single seamless interface.
To invest in all of these initiatives as well as other growth opportunities within the scope of the Capex outlook, we provided for the full year 2019.
Of course, the purpose of these investments is to drive growth. We are beginning to see the benefits of these capabilities improving our ability to win I'll give you. Another specific customer example of how investments and flexible scalable fiber based connectivity are helping us win in the market.
We recently won a contract to provide secure cloud connectivity to the US census Bureau for the upcoming 2020 senses, we will formally announced this contract later this week to support the census, Bureau's objectives to provide the best mix of timeliness relevancy quality and cost for the data they collect in the services. They provide centurylink will help to collect the census digitally by providing the bureau with managed trusted Internet protocol services or in tips at speeds of 40, Gigabits and higher.
Intense and managed security service that provides secure cloud based connectivity will support the online system that will be available to all households, completing the 2020 survey.
The solution also allows the census bureau to access the responses via secure cloud applications for the first time.
Centurylink was selected by the Bureau, due to our ability to meet their requirements for scalable connectivity and will play an integral role in helping US census go digital in the most secure reliable and cost effective way as it takes an important mission.
Completing the 2020 census.
Since this is obviously a unique example, but thats the point of hybrid networking solutions from Centurylink, our customers can enable the capabilities to address their particular need this solution highlights our ability to provide scalable flexible network solutions that we believe are defining the next generation of enterprise networking.
Turning to our own internal transformation initiatives as I noted earlier, we are making good progress in this area exiting the quarter with around $290 million in annualized run rate run rate savings.
We appreciate the cost efficiencies and we know they are substantial.
But the cost savings are almost a byproduct the real value comes from the significant improvements in the service experience both for our customers and employees that result from an entirely digital interaction model. These improvements not only enhance margins increased customer satisfaction reduce churn and improve sales.
This work is as important as anything we are doing in the business and we are very focused on doing it well.
Neil will cover the specific results of the consumer business, but I will highlight that we're continuing to see success with our micro targeting efforts as a reminder, we micro target, where we build fiber and our micro targeting our marketing and sales efforts to.
We are continually expanding these efforts in new neighborhoods and additional cities, where we have said about our consumer business still holds we will invest where we can grow revenue profitably and we will grow where we invest.
We are seeing the benefits of this approach and have more than doubled the number of subscribers with services at 100, Megabits per second and higher since the second quarter of 2018.
We will continue to push for higher market share in the areas, where we have invested to enable these higher speeds.
I'll also note that related to the consumer business, we took a $15 million charge during the quarter and conjecture in connection with a tentative settlement. We reached in the nation wide consumer class action cases, weve been defending since mid 2017.
The agreement remains subject to judicial approval, but were very pleased to have a tentative resolution of the class action claims behind us we've been very focused on simplifying and improving our customer experience since before this litigation was initiated and feel good about the ongoing improvements we're seeing in that part of the business.
Before I turn the call over to Neil I wanted to comment on the strategic review for our consumer business.
Our internal team and our advisors are making good progress in the review with that said as we mentioned last quarter. This will be a lengthy and complex process and we do not intend to provide updates until we have determined the best path forward.
In the meantime, we're not modifying our consumer investment and we're continuing to operate our consumer business to transform it and the services we offer.
I'll also reiterate something I touched on last quarter and that is that this process is not unusual for us we evaluate all aspects of our company on an ongoing basis to ensure we are using our assets to deliver the best value for our company and our shareholders.
If we see opportunities to drive higher levels of value with alternative approaches much much like you see us undertaking in the consumer review, we will do the work necessary to understand our options and implement the options that provide the best free cash flow per share return.
I'll now turn the call over to Neil to provide an update on our detailed financial results for the quarter. After that we'll open it up for your questions Neil.
Thank you, Jeff and good afternoon, everyone all start with our financial summary on slide seven.
We grew adjusted EBITDA to 2.269 billion from Seattle into six $2 billion in the first quarter 2019.
We expanded adjusted EBITDA margin over 500 basis points to 40.7% this quarter compared to 35.5% of the close of the level three transaction.
We were able to accelerate our cost transformation initiatives and delivered $290 million of annualized run rate adjusted EBITDA savings and based on our continued progress to date, we feel good about our financial performance and are reiterating our outlook for adjusted EBITDA and free cash flow for the full year 2019.
To put the first half of 2019 into perspective, we grew adjusted EBITDA by 80 million compared to the first half of 2018, while revenue declined more than 600 million over the same period.
This was driven in part by our focus on adding profitable revenue and deemphasizing unprofitable lines of businesses managing legacy product declines along with synergies and our cost transformation initiatives.
Turning to revenue on slide eight total revenue in the first quarter declined 5.5% to $5.58 billion.
Quarter over quarter total revenue declined 1.2% compared to the 2.3% sequential decline we saw last quarter.
As I just mentioned last year during the course of 2018, we implemented guardrails to drive profitable revenue.
Which has led to a difficult year over year comparisons.
Our AGM revenue was roughly flat compared to the second quarter 2018, adjusting for FX I again grew 1.6%.
Sequentially revenue increased 1.2% compared to a 3.5% decrease last quarter.
We did see an impact to revenue this quarter from the contract rigs that we mentioned last quarter.
However to those revenue declines were offset by strength in nonrecurring revenue items.
Keep in mind. This group contains some of our largest customers and we could see revenue fluctuations in any given quarter based on re rates or renegotiations, but over the long term, we feel confident in the trajectory of this business.
Moving to our enterprise segment revenue declined 1.2% both year over year and sequentially.
This compares to a decline of 1.6% year over year and 2.2% sequentially in the first quarter 2019.
Overall looking to the second half of the year for both gamma and enterprise our sales funnel is strong and we feel good about all the leading indicators for revenue growth.
As such we expect revenue for these two business segments to be higher in the second half of 2019 compared to the first half 2019.
SMB revenue decreased 10% year over year compared to a decline of 3.7%.
In the first quarter 2019.
Revenue in the second quarter 2018 included a benefit from several nonrecurring items, making the year over year comp challenging.
Sequentially revenue declined 2.5% compared to a decline of 0.1% last quarter as a reminder, in the first quarter 2019, we had particular strength in nonrecurring revenue.
The revenue declines in the SMB business are largely driven by legacy voice.
We feel good about our ability to sell into our on net building footprint with a large addressable market opportunity.
Wholesale revenue decreased 8.8% year over year.
As we referenced last year in the second quarter 2018 wholesale revenue included a favorable dispute settlement with a large carrier.
Sequentially, we saw a decline of 1.8% compared to a 3.4% decline last quarter.
Slide nine has our product mix by business segment in both our game and enterprise, we expect that sales growth in other product lines will offset legacy voice declines.
In the SMB segment, despite sales growth given voice represents 45% of total revenue in the journey will be a bit longer.
Turning to consumer on slide nine second quarter, 2019 revenue declined 8% year over year, and 1.7% sequentially and is generally in line with the revenue performance. We saw in the first quarter 2019.
In the second quarter, we saw a net loss of 56000 total broadband subs with declines of 78000 speeds below 20, Meg and growth of 22000 speeds of 20, Meg and above within those gains we added 48000 speeds of 100, Meg and above.
I'll also note that growth in our greater than 100, Meg solve this is up more than 100% on a year over year basis.
Broadband revenue for the second quarter, 2019 grew 1.8% year over year, which compares to growth of 1.4% last quarter.
Driven by our efforts to increase penetration in our competitive assets and investing in fiber.
Voice revenue on a year over year basis declined 13% this quarter compared to 12% last quarter.
The decline in other revenue continues to be driven by our decision to deemphasize our prism video product.
Regulatory revenue is down year over year due to the adoption of new lease accounting standard.
Turning to adjusted EBITDA on Slide 11 for the second quarter 2019, adjusted EBITDA was $2.269 billion.
Compared to 2.271 billion from the year ago quarter.
Adjusted EBITDA margin expanded to 40.7% for the second quarter of 2019 compared to 38.5% in the year ago quarter.
We continue to focus on adjusted EBITDA growth and margin expansion as we drive profitable revenue and our transformation efforts.
As of the end of the second quarter, we achieved approximately 290 million of annualized run rate adjusted EBITDA transformation savings. We are pleased with our ability to accelerate transformation savings in the first half of 2019 and feel good about our progress going forward.
Integration and transformation costs and special items incurred in the second quarter 2019 impacted adjusted EBITDA by 54 million in free cash flow by 55 million.
Overall, we continue to make progress in taking costs out of the business, excluding transformation costs and special items. If you look at our adjusted EBITDA impacting costs for the second quarter 2019.
We have reduced costs on an annualized basis by roughly 1.3 billion compared to where we were a year ago.
And 2.3 billion since the close of the level three transaction.
The improvement in our cost structure is driven by a combination of synergies transformation savings and our focus on profitable revenue.
Moving to slide 12 for the second quarter of 2019 capital expenditures were $800 million.
For the first half of 2019 capital expenditures increased approximately 10% to 1.73 billion compared to 1.58 billion from the year ago period.
As Jeff just mentioned, we continue to invest in our fiber footprint and product capabilities positioning us to take advantage of existing and emerging market opportunities.
In the second quarter 2019, the company generated free cash flow of $956 million.
Turning to slide 13.
We exited the quarter with our net debt to adjusted EBITDA ratio at 3.8 times, which compares to 4.3 times at the close of the level three transaction.
We remain highly focused on getting to our 2.75 to 3.25 times net leverage target over the next three years.
During the second quarter, we reduced outstanding debt by approximately 700 million.
Primarily through a tender offer open market purchases and term loan amortization.
In addition, we recently announced the redemption of $400 million in bonds that will close in late August and we expect to pay down an incremental $400 million debt at maturity over the next few months.
Overall at this point, we have a clear line of sight to lowering debt by 1.7 billion through actions already taken or that are planned for the rest of the year.
Turning to the business outlook on slide 14, we feel good with our progress in the first half of the year and are reiterating our full year 2019 financial outlook measures for adjusted EBITDA of nine to 9.2 billion free cash flow of 9.12, and three sorry free cash flow of 3.1 to 3.4 billion in capital expenditures of 3.5 to 3.8 billion.
Please note that we slightly adjusted our outlook for dividends paid and depreciation and amortization.
In summary.
We remain focused on execution, specifically on improving revenue trajectory for the second half of 2019.
Maximizing profitability and remain disciplined on our cost transformation and deleveraging initiatives.
With that we'll open it up for your questions.
Thank you mean, France would you would you explain the process.
Absolutely if you would like to register your question. Please press the one followed by the four on your telephone.
You will hear me three Tom from to acknowledge Jimmy Classic. If your question has been answered and you would like to withdraw. Please press the one followed by the three.
Our first question from the line of better Levy with EUV, Yes. Please go ahead.
Great. Thank you.
First a little bit more color on the enterprise trends if you could provide for the second half I believe you typically see higher CP sales can you parse out the improvement on.
Regular services versus CP and just a follow up I believe you mentioned couple of nonrecurring items in high again wholesale in the quarter any chance you could quantify those.
Third.
A lot of discussions on potential changes in terms of Caf.
Subsidies that you collect right now how do you think about that going forward that would do what the I believe you collect about 500 million on an annual basis right now.
Would you still be interested in participating in the auction next year. Thank you.
Well, Jeff I think there's a lot of questions in there so all if I Miss any.
Ian I'll come back.
So on on enterprise.
If you think about our enterprise segment.
Our sales in fourth quarter and in January and February were impacted lives.
The government shutdown, but we saw good sales in March and we saw good sales in the second quarter of this year. So we did.
Good sequential growth in sales, so given timing of installs.
And Thats part of the reason we feel good about the second in the second half of this year on on Seabee, We've really deemphasize on profitable CVSR CB revenue is down a fair amount on a year over year basis.
So the driver for enterprise growth is really.
Sales and install just to put that in.
And just to add I apologize Neil.
On the CD, that's a conscious decision that's something that we intentionally did we still sell CP, but we do win brings network with it when we can do managed services and professional services. When we can do things to increase the margin around that in the past there were times. When we were just sell CP without any of those other services and we stopped doing that that doesnt make us money distracts, our organization and Thats one of the efforts around profitable revenue that we focused on.
Yep.
And then just a burnt in the context I think if you look at our enterprise year over year, we're down about 1.2% that's up about 18 million or so in in you know last year, we terminated government contract that was unprofitable, we deemphasize low margin seems be red cells, and we put a lot of guardrails around profitable business. So in that context, we are barely fairly pleased with the performance of the enterprise business and the latter half of the year is driven by sales and installs.
Yeah in terms of idea them in the fourth quarter I noted that we had a larger in negotiation with with a customer a hyperscale our customer and that drove.
As sequential pressure on revenue, while we did offset that with nonrecurring services professional services and other things and that was call it roughly around $15 million or so.
And again and again, we saw growth in sales sequentially and we feel good about the second half of the year.
My comment on wholesale onetime was more related to the comment I made in first quarter, we had a large carrier renegotiation in the first quarter that that impacted revenue and we saw the full quarter impact of that in second quarter and if you are looking a year over year for wholesale second quarter of last year add large carrier settlement that impacts the year over year comparison.
And then with respect to the Caf question.
And whether we will participate in the upcoming auction. The rule. The suggested rules has just come out we've got a comment period I think till the end of the year, we'll look at it and we'll see if it makes sense and if it does for US then we will we will participate in those auctions and if it doesnt make sense then we won't if you look historically there were sometimes we participated and sometimes we didnt.
And so we will evaluate that.
As the rules get finalized in as we look into the specifics.
Yeah. The other thing just to add to that idea and keep in mind on Caf. There is a cost capital offset as well so to the extent that we.
We're now getting funding at the revenue line, we're also not spending capital.
Great. Okay. Thank you.
Our next question is from the line of Simon Flannery with Morgan Stanley . Please go ahead.
Great. Thanks, a lot.
Thank you for the color on the fiber deployment can you just give us a sense of how much that is cost string and what the timeline is to get to completion, there and maybe any thoughts about his capital intensity likely to continue into 2020, and then any comments on M&A opportunities I think you've talked about tuck ins and maybe some international opportunities over time, but we haven't seen you do much for a while.
And any color on what you might be interested in there would be great. Thank you.
Sure.
With respect to how much capital.
We haven't given out any of that information what I will tell you is fully contemplated in our 2019.
Capital outlook that we provided and it's part of the growth initiatives that we talked about over.
In previous earnings calls the completion is.
The end of 2021, the majority of that long delay has to do with Europe , and North America I don't have the exact date in front of me, but that it's not a network where you got to wait until everything's turned up we prioritize the routes based on the demand from our customers we will activate those routes.
We are in the process of activating them Weve installed the fiber will continue to do that based on the prioritization date.
Our customers want.
So we're really pleased with our ability to roll. This out very quickly. If you. If you have a network. That's the direct buried into the Earth. It cost you an enormous amount to open a new tranche. It cost you an enormous amount.
Of time to get all the rights of way and all of that and what we do is we brought in rope. The conduit, we we pull the fiber directly into the content is very simple very straightforward and very cheap compared to alternative. So we're really pleased to use our our very extensive conduit network to take advantage of that with respect to M&A.
We don't don't really talk about M&A before we do something we will continue to be.
Active in looking we're an acquisitive company, we'll make sure that that anything we do.
It is accretive to the business and free cash flow basis in a functionality basis and so we'll continue to look at that but right now our real effort is transforming centurylink and looking at the way that we interact with our customers and creating an environment, where we can do seamless things I mentioned in the in the prepared remarks, our dynamic connections dynamic connections for enterprise customers allow them to establish connectivity with us and then use that connectivity by typing in a few key strokes to either increase the speed or redirected from one cloud service provider to another or one of their datacenters to another and really gives them the flexibility to use that in a digital way. The next step of that obviously is to create a connection between their systems and our systems, where where their AI tells us to automatically upgrade that capacity or do do something and so thats really the effort of.
Ours over the next couple of years and so there's some tuck in type ideas that might make sense to go with that.
But we don't talk about any specifics until we do something.
Great. Thanks, Jeff sure. Thank you Simon.
Our next question from the line of Philip Cusick with JP Morgan. Please go ahead.
Hi, guys. Thanks.
I guess two first on the consumer side recognize you don't want to talk about strategic options can you tell us if you've ruled anything out at this point or things that you may have talked about rolling out back in may if those have possibly come back to the floor.
And then sticking with the fiber build can you expand on your plans from here around metro and long distance fiber.
And how would that fiber build may have impacted any dark fiber bookings and how we should think about that going forward. Thanks very much.
Sure.
And I got distracted on the consumer at first of all I don't know anything that we might have set in may.
So theres something specifically I've said.
Remind me of it.
But no in answer to your question and and I won't take any more questions on the consumer process just because.
Just because it's still early in the process and I don't have any anything any real update but we haven't ruled anything out we're open minded and we think that that it's important for us.
To to look at all options and including continuing to own and operate it and so we're open to all of the various options and really just trying to understand.
The best way to maximize free cash flow per share for our shareholders over the long time.
And then the second question was on the overbuild.
And the impact that has on on dark fiber is that right.
Correct. Thank you.
Yes.
Hey, guys great impact on dark fiber, we are we are quietly.
A very large dark fiber sales company, we don't emphasize it that much externally.
But we love it we have great customers.
This ultra low loss fiber is important to our dark fiber customers in some of our dark fiber customers not all of them, but the Hyperscalers I mentioned.
Large enterprises that have huge bandwidth requirements.
And then again some of our dark fiber customers that are trying to serve their own needs internally and so we think it will be we think it's a real opportunity for us.
Thanks, Jeff sure.
Our next question is from the line of Brett Feldman with Goldman Sachs. Please go ahead.
Hi, Thanks, and just a follow up on something you were discussing during your prepared remarks, Jeff you've talked about low calorie revenues and how you've been winning the company off of our products and services that weren't helpful to the bottom line for a while now I still think you're current period topline results are being compared against prior periods, where maybe there was more of that in the next I guess I'm just trying to understand do you think you hit a lot of the significant opportunities to maybe get the mix from a profitability standpoint, where you wanted to be so that maybe we'll have better visibility into sort of the true organic trajectory of the business or do you still have more this you want to do and then just overall I'd be interested in hearing your thoughts on the enterprise Eni Gam demand environment I feel like we've gotten mixed messages from some of your large peers about what the market environment is like and Im curious the extent to which the demand backdrop is influencing your view on where the second half of the year is going to shape out. Thanks sure.
I'll answer the low calorie and then let Neil add any specifics he wants to do.
I think it's it's getting behind us theres not any any super major low calorie revenue that we're targeting today, we in the consumer business. We said, we're going to deemphasize the prison linear TV, we've we've deemphasized contracts that and gotten out of contracts that we thought were underwater.
We stopped selling CP.
A lot of that is still in the year over year comparisons Brett so that makes it kind of difficult, but if you start looking at the sequential comparisons.
It will be in their less and less.
So I think that that going forward.
We'll stop talking about that even though they are going to be some here and there that that affect us. The other thing that we're trying to do though is with some of this low calorie revenue, we're trying to increase the the the profitability by moving things off net to our net.
And then we will do rate hikes, and if we can.
If we can't make it profitable than it with with rate hikes and the customer may lose leave us.
But those are small things around the edges I think it.
Starting to fall out of the year over year comparisons, but it's going to be faster falling out of the sequential comparison.
Yeah, just to add a call, but it really is around the edges brought I think if you look in the other in the product breakdown for other for example in consumer that's where a lot of the prism revenue as so sequentially. It was down six 7 million. So that will continue if you look at our Ikea and managed services products and that's where we have some of the legacy hosting if you will and some of that will continue to attract so it really is around the edges and that was part of the reason why we talked about in our enterprise and I am growth. We said second half will be higher than first half because first half is relatively clean compared to last year, where we were working through a lot of that.
And with respect to.
Hi, Dan Enterprise the demand environment that we see.
Look we love this business, we think theres.
Great demand out there for the types of products and services that we sell and the demand is growing.
For for those types of products and services now some.
There are some.
Products that are going to decline as customers transition to the us.
In transition to the newer products and services and we think Thats a good opportunity to go out and take share from from other people and help those customers make that transition. So we think market is good for US. We think we have great assets and great network capabilities, we want to continue to expand that and augmented adding 4500 buildings in the first quarter gets us to more customers, adding 5000 buildings in the second quarter gets us to more customers gives us a better footprint to deliver those services on we know when we sell on net we do a better job for the customer we make more money. It's all around a good thing and so so we look at the market and I've said this for a long time, it's weather, whether it's the market or the economy, we look at it and say it's up to us to execute.
Centurylink executing the way that we can with the network assets that we have with the capabilities and the products and services in the managed services and and all of those things if we invest appropriately for growth continuing to augment our capabilities we win.
And so I I don't really have any great comments on the market other than.
It's good for our products and services.
Thank you.
Sure.
Our next question is from the line of Frank Louthan with Raymond James. Please go ahead.
Great. Thank you walk us through the current pricing in in wholesale in General and then I know you said, you're not going to touch so much in M&A, but are there other assets, possibly that that you view you might want to divest to try and help with leverage maybe data centers or CDN business something like that.
So I'll take the second question then Neil can talk about the pricing.
As I said in the previously on the.
And the answer and in the prepared remarks, and we look at everything and we are we are not opposed to.
Evaluating each individual business that we have each individual line of business and we will continue to do those types of things and there is nothing I want to call out.
But that there are some things that the.
We're actively looking at and have been since the.
Over the past several months.
And we will continue to do that one of the things you got to do is you got to have a willing buyer and a willing seller.
And we're in the process of figuring out first of all if we're willing seller and secondly, if theres a willing buyer out there now that what we do know.
Is that regardless of the particular product or the particular line of business. If we broke focus on growing free cash flow and we have options to whether we want to keep it or not keep it and so every part of our company. We are looking at how do we get it to contribute.
Free cash flow and if we don't think we can for example, the prism TV. If we don't think we can get it to contribute the level of free cash flow that we want we'll stop doing it.
On the on the pricing side.
Frank I would say overall, we in the wholesale I think your question was specific to also we see rational behavior and we we follow the market fairly closely.
For access, particularly we see areas, where others are raising prices. So we started to stay competitive but if there is an opportunity to raise prices. We'd raise if there are multiple combo competitors and we need to lower prices, we do but overall, we think the return profile given the current pricing looks very good and part of our business is a wholesale voice business in wholesale and we manage that as a trading desk on an everyday basis. So thats all based on margin. So we really don't care about the topline there we have guardrails around what margins, we want to make on a per minute basis, and we managed that like a trading desk.
Okay, great. Thank you very much.
Sure.
Our next question is from the line of Nick del Deo with Moffettnathanson. Please go ahead.
Hi, Thanks for taking the questions.
No first the billet additions you've noted the past few quarters have been a pretty substantial.
Can you talk about what share of those ads are primarily driven by efforts to move off net traffic on net for existing customers versus buildings that you otherwise targeted.
And should we think of this pace as what you can sustain for the next several quarters.
First of all thank you for noticing that there is substantial.
Because we're working hard at it and I will tell you that we.
Prioritize buildings.
For.
Off net on net we prioritize them for free cash flow.
I hate to keep using the same phrase, but it actually effort.
The driving factor behind our company and so so off net on net is a guarantee and we know it.
Existing sales is another way that we prioritize them.
And there is not quite.
Not all that many that we do a build it and they will come type approach. That's that's very.
Very rare so so the addressable market or opportunity for us to remain at this pace and I can't predict how long, but it's going to be driven by as long as we're finding buildings that we can generate we can profitably build into that make us money. We will continue to do that and and it's not a limiting factor of our ability to turn those buildings up the it's a limiting factor over the long term will be what types of Uh huh.
Returns do we get for each of those buildings and right now were very pleased with it. So I can't give you a prediction of how long it will last I will tell you is that when we look at our capital outlook. We factor in these building adds as well so as you look at our capital outlook and you think about about it for the year, whether its long haul ultra low loss fiber whether it's.
Edge computing expansions or or building ads, that's that's factored into our capital outlook.
Okay got it and then.
Jeff You noted in your in your prepared remarks, your focus on customer satisfaction.
Kind of along those lines can you share any details regarding what churn trends have been like in the business.
Yeah. So.
Qualitatively the churn has been pretty good you know, especially year.
After an acquisition.
We're pretty pleased with the churn and that tells US we didn't do anything wrong in working with our customers.
And then very necessarily did everything right, but it tells you didn't do anything wrong and if you look at our churn across the business.
Broadband subs in and consumer although there's seasonality in the second quarter typically if you look at year over year second quarter.
We're pretty pleased with our overall turn.
Enterprise wholesale wholesale we've described for a long time to be flat to slightly down and it's going to continue at the trends that it is as just the nature of that business.
But we manage it again, we manage it pretty heavily for margin for contribution.
Got it all right. Thanks, Jeff.
Thank you Nick.
Our next question is from the line of Tim Horan with Oppenheimer. Please go ahead.
Thanks, guys.
This is Tom.
<unk> revenue decline.
Yes at this point.
Can you give a little bit more.
No color I know you gave two line items on revenue loss in the second half this year and maybe.
Yes. It is a lot of moving parts and just throwing a lot of money yet.
Putting the infrastructure in place that Leverages a lot of your existing infrastructure was really really smart move.
And deemphasizing, obviously, a lot of legs to talk about any color on when you can get to breakeven on revenues. Thanks.
So I think.
Tim I think the year over year gets complicated because of all the noise last year and then if you think back to fourth quarter of last year, we have the noises, but then we also add.
Yeah.
Strengthen a lot of non recurring revenue items that we called out in our fourth quarter earnings call, but but in general I would say if you if I look at the first half of this year compare that to first half of <unk>.
You know last year more than a third of the revenue decline.
Is driven by a lot of the actions we took whether its prism on profitable you know gam contract on comp profitable government contract deemphasizing CP etcetera. So like Jeff mentioned earlier, we don't have a lot more lab to go.
So going forward.
The comparisons are going to get more cleaner.
And in terms of trajectory I think like we said we feel good about our game and enterprise.
SMB. The challenge we have is it still has a fair amount of legacy voice our sales actually grew sequentially second first quarter second quarter over first quarter, while we need a lot more improvement, which we think we have the addressable market and we're focused on growing sales. So again at some point to offset some of the legacy declines and I am very focused and Lisa Miller, who runs that business unit is very focused on selling to small and medium business in lit buildings outside the legacy Centurylink footprint level three never focus there because that's not the type of customer we focused on centurylink that never focus there because that's not the type of.
We didn't have the network to sell to those customers and so neither side of the previous companies focused on those that's a great opportunity for US we have to stay focused and we have to really drive drive our opportunities outside of the region for those those customers.
And the one other comment I would add is on the consumer side. If you look at our broadband business.
We're investing in that business, we're focused on the competitive asset.
Broadband revenues grew year over year.
This quarter it grew year over year last quarter, and I think it grew year over year, all four quarters of last year and there were going to continue to focus on that business and also focus on expanding the margins for those business that business like Jeff mentioned in terms of how we interact with customers with self install and digital interaction et cetera.
So maybe just.
One more question sorry.
How about on the free cash flow.
The next couple of years ago, obviously, a lot of moving parts of the business model do you think free cash flow can be relatively stable at this run rate over the next three years to grow or should we expect some declines with all the moving parts.
So look I think we'll have more to say about next year's free cash flow when.
We get to that at that point, but directionally. Our objective is to continue to grow EBITDA.
And we feel good about that.
From a capital standpoint, like Jeff mentioned, a lot of these investments that we're making are within the existing envelope. So if you look at our current.
Capital guidance, then gets factored in there in fact, a lot of the fiber deployment.
Spending was last year. When we spent only 3.22 billion. So we're going through a massive effort in terms of reorienting in terms of where we spend capital. So we're not spending capital.
In areas that we don't think we are getting a return and really focused on long life investments. So I think thats all factored into our capital and if you think about net cash interest with our deleveraging efforts and given the interest rate environment that should improve so just to give you a flavor for where our free cash flows at it.
Thank you.
Our next question from the line of David Barden with Bank of America. Please proceed.
Hey, guys. Thanks for taking the questions.
I guess, just a couple of Neil.
On the mathematics of getting a better second half.
Out of enterprise and again.
Especially for enterprise it suggests.
Pretty healthy kind of U. turn in the business and in.
Yes at least the third quarter, if not before then.
My guess is that you mentioned a few things that gave you conviction on there you mentioned sales funnel in particular I think both of you mentioned it but I imagine mid third quarter now we've got to be on the install part of that.
Kind of process and I was wonder if you could kind of elaborate a little bit.
If the conviction that you're having on the second half being better than the first half is coming from that.
That installation process and the fact that things are actually happening on the ground, especially if there was that 15 million onetime or international.
The second question was on the math of the transformation program that.
Quarter to quarter change from one key to Twoq would suggest we're on track to maybe be at a $600 million.
Run rate by the end of the year.
And I Wonder if you could kind of.
Elaborate on whether that is realistic and if it is kind of the pieces parts that will get you there. Thanks.
Sure David.
So on on the enterprise.
You are right a big part of that is installs.
Because like I mentioned I think a big sales Ram came up came in in March and then second quarter was a good quarter of sales for.
Enterprise.
But given the nature of customers in that segment. Some of these deals are large deals over 100 node network. So it takes a while to get those installs.
And.
So, yes, we need to execute on all the installs and then there is the sales funnel, which people feel good about but that will impact more all fourth quarter. So the third quarter impact improvement in revenue will largely be driven by by installs and similar on diagram front as well.
And.
So yes, the leading indicators were positive about on the transformation from.
We were able to accelerate.
And.
But I think.
For the second half of the year or I would say if you look at.
Our overall guidance of 802 billion over three years with 10 more quarters to go I would think about it as $50 million to $70 million per quarter is.
You know kind of the baseline, but at the end of the day, if we can accelerate we will but we're not banking on accelerating.
Great. Thanks, so much guys.
Our next question is from the line of Mike Mccormack with Guggenheim. Please go ahead.
Hey, guys. Thanks, just maybe a quick comment.
And then secondly for Neil on the leverage side.
Obviously, we still have a lot of that coming out of legacy revenue streams.
Just trying to get a sense for how you sort of bifurcate those streams and whether or not it's more accessible to have maybe a higher threshold of leverage some of the newer stuff and perhaps a little bit lower on the on the legacy declining revenue streams.
Any thoughts on that would be great. Thanks.
Yes.
I have not had a fiberglass question in years.
So so Mike thanks, Thanks for taking that went up.
If you think back to 2000 2002, when there was a glut of fiber it wasn't a glut of fiber it was a glut of fiber providers and so we had level three and quest and we'll tell in broad wing and I Ixia and all these companies going out and building the same assets between the same location and and then they started getting into trouble and when you get into trouble. The next dollar revenues leased another dollar revenue. So you get irrational pricing. We don't have that today, we don't have a glut of fiber obviously, we wouldn't be augmenting fiber. If there was a glut in the industry. We don't have a glut of competitors out there a lot of good fiber competitors lot of good companies.
But there but for the most part it's a rational market and were.
Building fiber, where we need it I don't worry about fiber glut I don't worry about.
Some irrational player selling.
Fiber for ridiculous prices its.
Fairly rational market, it's a competitive market, but it's a fairly rational and.
So so I'm pretty pleased with where we are I don't worry about not worry about that much.
So Mike I'm good.
Those are painful days.
They were painful day.
For all of Us.
So Mike I'll take a shot at your question I'm not sure I completely understand it but.
I'll come back and buy if I don't address it.
So the way we think about it is we are first of all we are deleveraging. So we're we feel good about that plan.
In terms of all of our investments, they're going big chunk of that if you hear commentary and what we're focused on is really on long life asset primarily fiber.
Whit supports different technologies.
And.
And what we're working on is really transitioning from legacy EBIT out to a newer services on on that right. So and that will be an ongoing process and as an industry for some of us have been in this industry for a really long time, we've gone through that transition several times and so we're managing that and at an aggregate level in terms of what leverage makes sense and we don't really think about it in the piece parts if that makes any sense.
Yes, I guess I was just sort of thinking about as that transition occurs does that.
Not so much obviously this year, but longer term leverage ratio would have changed that dynamic for you. Obviously legacy level three was a bit more highly levered.
Yes, yes, but for the near term I think the range, we feel good with the 2.5 and two 3.25, we feel very comfortable with that and then if we get to a different dynamic than what we won't give it some more thought.
Great. Thanks, guys.
Thank you Mike.
Before we finish I think that was the last question. So before we finish the call I'd like to wrap up with a few key points, we remain focused on growing adjusted EBITDA and expanding margins.
We delivered on those objectives again this quarter, while also focusing on improving the customer and employee experiences.
With a solid quarter of sales and a strong funnel, we've seen signs of improving revenue performance and expect a better second half of the year for I gaming enterprise.
We continue to evaluate strategic options to create value with our asset portfolio in the meantime, we're working diligently to operate the business for growth maximum efficiency and long term return to free cash flow per share.
We're excited about the investments, we're making to continue to enhance and expand our fiber network and to solve our customers' evolving networking needs like edge computing.
We continue to make progress toward our de leveraging objectives and expect to meet our leveraged target within our three year timeframe.
And finally before I conclude the call I'll remind you that as always our guiding principle is growing free cash flow per share every action. We take in every option. We review is in the context of that metric.
Thank you all for joining today's call and for your continued support of Centurylink.
France that concludes the call.
Thank you we would like to thank everyone for your participation and for using century links conferencing service. Today. This does conclude the conference call. We ask that you. All please disconnect your lines have a great to everyone.
Okay.