Lumen Technologies Inc (LUMN) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to CenturyLink's third-quarter 2013 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to turn the call over to Mr. Tony Davis, Vice President of Investor Relations.

Mr. Davis, you may begin.

Thank you, Said.

Good afternoon, everyone, and welcome to our call today to discuss CenturyLink's third-quarter 2013 results, released earlier this afternoon.

The slide presentation we will be reviewing during the prepared remarks portion of today's call is available in the Investor Relations section of our corporate website, at IR.

CenturyLink.com.

At the conclusion of our prepared remarks today, we will open the call for Q&A.

On slide 2, you will find our Safe Harbor language.

We will be making certain forward-looking statements today, particularly as they pertain to guidance for fourth quarter 2013 and other outlooks in our business.

We ask that you review our disclosure found on this slide, as well as in our press release and in our SEC filings, which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements.

We ask that you also note that our earnings release issued earlier this afternoon, and the slide presentation and remarks made during this call, contain certain non-GAAP financial measures.

Reconciliation between the non-GAAP financial measures and the GAAP financial measures are available in our earnings release and our on website, at www.CenturyLink.com.

Now turning to slide 3. Your host for today's call is Glen Post, Chief Executive Officer and President of CenturyLink.

Joining Glen will be Stewart Ewing, CenturyLink's Chief Financial Officer; and also available during the question and answer period of today's call will be Karen Puckett, CenturyLink's Chief Operating Officer; Bill Cheek, President of Wholesale; and Jeff Von Deylen, President of Savvis.

Our call today will be available for telephone replay through November 13, 2013, and the webcast replay through November 27, 2013.

Anyone listening to a taped or webcast replay or reading a written transcript of this call should note that all information presented is current only as of November 6, 2013, and should be considered valid only as of this date, regardless of the date heard or reviewed.

As we move to slide 4, I will now turn the call over to your host today, Glen Post.

Glen?

Thank you, Tony.

Good afternoon, everyone, and thank you for joining us today.

First, I would like to take a moment to acknowledge the hard work and dedication of our employees in the northern Colorado region.

During the worst of the flooding that occurred there in September, we had thousands of customers experience service outages, among, of course, other hardships.

Our local field operations team worked around the clock to manage unprecedented work loads for several weeks, and we brought resources from around the state and country into the Front Range area to support our local teams; and they all did an amazing job restoring service to our customers there.

So our thoughts and prayers go out to all those affected, including our employees who have been personally impacted by that event.

Turning to slide 5, we are pleased with our financial results for the third quarter, as we continue to make good progress on a number of fronts.

We believe our investments and our key strategic growth initiatives continue to strengthen our overall product portfolio, which further positions CenturyLink as a leading integrated provider of global network, data hosting and cloud solutions.

I would like to address a couple of significant special items that affected our financial results for the quarter.

First, as you saw in the press release, we booked a $1.1 billion non-cash goodwill impairment during the quarter.

The impairment was related to goodwill assigned to the data hosting segment, and it was primarily due to our recent performance being factored into the development of growth projections used for calculating impairment.

We are not satisfied with our recent results in this segment of our business, and we will be taking aggressive steps to drive the revenue growth and margins in this segment to be more in line with industry growth rates going forward.

Secondly, we have reached a tentative agreement on the principal financial terms of a potential settlement of the KPNQwest bankruptcy litigation in the Netherlands.

The oral agreement was reached following confidential mediation between CenturyLink, KPN, and KPNQwest trustees.

As a result, we have recorded EUR172 million, or $233 million, based on September 30, 2013 exchange rates, pre-tax charge this quarter.

This proposed settlement amount of EUR172 million is significantly below the EUR4.2 billion litigation claim.

We are hopeful this settlement we finalized, and look forward to putting this issue behind us.

Beginning on slide 6, I would like to review some highlights from the third quarter.

We generated solid financial results, with annual strategic revenue growth of 4.2%.

Excluding low speed private line data services, our strategic revenue grew by 12% for the quarter.

Strengthened revenues from high speed internet, high bandwidth data products, data hosting, and Prism TV were the primary drivers of this growth.

We generated strong subscriber growth in the quarter, adding 33,000 broadband customers and 17,000 Prism TV customers.

From a business market perspective, we experienced strong new sales to business customers for network and hosting services during the quarter.

And also in the quarter we made strong progress on the share repurchase program we announced in February.

Through November 5 of this year, we repurchased 38 million shares, or 6.1% of our outstanding common stock, for a total of approximately $1.3 billion.

We have repurchased shares aggressively since the start of the program, and we expect to opportunistically buy back additional shares going forward.

Through the combination of dividends and share repurchases, we returned over $2.2 billion to shareholders through the first three quarters of the year.

That is a 63% increase, compared to approximately $1.4 billion during the first quarter 2012.

As you turn to slide 7, I'll provide an update on our key strategic initiatives, starting with broadband expansion enhancements.

We continue to make significant investments in this area that we believe will better serve our business and consumer customers.

We ended the quarter with approximately 5.94 million broadband customers.

As I said earlier, we added 33,000 new subscribers in the quarter, which was a strong improvement from the seasonally weak second quarter.

We believe our fiber assets, including nearly 240,000 fiber route miles across the US, helped position us well in the business market.

We continue to grow our advanced multi-tenant unit MTU program.

We added 400 fiber-fed buildings in the third quarter, increasing the number of fiber-fed buildings by 40%.

This program offers broadband capabilities of up to 500 megabits of symmetrical service and enhances cloud connectivity for these business customers.

In addition, we plan to leverage our existing fiber to opportunistically expand speed and service capability to high value business and consumer customers.

We are focusing on GPON technology in certain high density business districts, offering broadband speeds of up to 1 gigabit.

Both the MTU and GPON programs offer upstream speeds and business service level agreements for SLAs beyond what is normally available with cable companies.

These offerings are particularly compelling in the business market, where upstream capabilities are critical to the enablement of cloud services.

In business areas where we do not offer advanced MTU or GPON programs, we have extensively deployed Ethernet services.

We currently cover over 2 million business locations with Ethernet capability, with nearly half of this footprint capable of 20 megabits and higher symmetrical speeds.

In Omaha, which is our first GPON 1 gigabit trial market, we had deployed 1 gig service capability to over 40,000 homes, and we expect to reach nearly 50,000 homes in the trial area during the fourth quarter.

We are very encouraged by these early results in Omaha, and we announced in October, that we will expand our fiber network pilot to Las Vegas, enabling internet speeds of up to 1 gig to consumers and small businesses in select neighborhoods in that market.

In the months ahead, we expect to continue making investments in our network to enhance speed capabilities required to deliver competitive broadband products and services across our markets.

Turning now to slide 8, our Prism TV service continues to perform well, and represents a very compelling entertainment alternative to cable TV service in the markets where we offer this service.

We added a record 17,000 Prism TV subscribers here in the third quarter, ending with a total of 149,000 subscribers in service.

Over 50% of these added customers are new to CenturyLink, and they continue to have a high rate of broadband attachment.

This quarter, we expect a record level 98% attachment rate.

We continue to expand the footprint where Prism service is available, and in third quarter we added approximately 285,000 addressable homes, of which just over half were the in the newly launched market of Phoenix, Colorado Springs, and Omaha.

We are very pleased with the early Prism subscriber growth in our first legacy Qwest markets to provide this video service in Phoenix, Colorado Springs, and Omaha.

Prism triple-play bundle customers are significantly less likely to churn than single-play voice customers.

In the third quarter, the churn rate for Prism triple-play customers was over 600 basis points lower than single-play voice customers.

In addition, we continued to enhance our [offered] TV features, by introducing new functionality and applications, including expansion of our TV Everywhere capabilities, our video on demand library, and a recent successful trial of wireless set-top boxes.

Turning now to slide 9, a third key strategic initiative is investing in fiber builds to as many towers in our service areas as economically feasible.

During the third quarter, we completed approximately 1,200 fiber to tower builds for a total of over 17,900 across our footprint.

We currently expect to complete a total of 3,500 to 4,000 builds in 2013.

That is slightly below our previous expectation of 4,000 to 5,000, primarily due to construction delays by wireless carriers.

As expected, we continue to experience some revenue compression as our wireless wholesale customers transition on copper based DS1 facility to fiber based Ethernet services.

However, we anticipate that wireless data bandwidth growth will result in expansion of Ethernet consumption, and thereby reverse the current revenue compression during 2014.

Moving on to slide 10, in managed hosting cloud services, we continue to believe we are well-positioned to capitalize on long-term growth opportunities in this space, where we are expanding our strong product offerings.

We experienced weaker than expected sequential data hosting revenues, primarily due to one-time credits, and legacy Qwest hosting churn end of the third quarter.

Despite weaker third quarter revenue, we continue to expect revenue growth in the second half of 2013 compared to the first half of 2013.

We continue to build upon the sales momentum of the past few quarters, with solid new sales again this quarter.

Cross sell or team selling opportunities for hosting products across our hosting and networks sale teams continues to be strong, with sales of hosting services to business customers steadily growing.

We expect this momentum to continue as customers continue indicating strong demand for managed hosting cloud solutions to streamline their operations and increase efficiency and reduce costs.

As we work through the exiting of a few major co-location customers from the legacy Qwest data centers, more fully enabling the selling of hosting products to our large base of business network subscribers and expand our own boarding process, we expect to see significantly better growth in our hosting operations.

We continue to invest to increase our data center capacity, as well as expand our product portfolio to meet customer needs and expand our market opportunity.

We currently have 55 data centers globally.

In the third quarter, we added approximately 25,000 square feet of sellable floor space to the expansion of existing facilities in three markets.

And year to date, we have added approximately 80,000 sellable square feet.

Lastly, we recently expanded our partnership with VMware, allowing Savvis and VMware to operate enterprise services on VMware's hybrid cloud, powered by Savvis co-location services, and we are pleased with that partnership development.

Finally, before I turn the call over to Stewart, I am pleased the tentative agreement with the CWA and IBEW was ratified in late October.

The contract covers 12,000 employees, and will be effective through October 7, 2017.

Our focus in these negotiations has been to align the cost structure and work rules under this agreement with the rest of our organization, and the competitive dynamics in the markets where we operate.

I believe we have made progress toward these objectives.

Overall, I'm pleased with the solid results for the third quarter.

We continue to vest to drive growth, and are experiencing good traction in these key areas.

And with that, I'll turn the call over to Stewart for an in-depth look at our financial results.

Thank you, Glen.

I'll spend the next few minutes reviewing the financial highlights from the third quarter, and then conclude my remarks with an overview of the fourth quarter guidance we included in our earnings release issued earlier this afternoon.

Turning to slide 12 -- on a GAAP basis, we reported a net loss of $1.05 billion and a loss per share of $1.76, primarily driven by the two special items Glen mentioned earlier that were disclosed in our press release.

For the remainder of my comments, I will be reviewing the results excluding special items, as outlined in the earnings release and associated financial schedules.

As you can see, we generated solid operating revenues and cash flows in the quarter.

Operating revenues were $4.52 billion on a consolidated basis, a 1.2% decline from third quarter 2012 operating revenues.

Our core revenues, defined as strategic revenues plus legacy revenues, were $4.1 billion for third quarter, a decline of 1% from the year-ago period.

Our strategic revenues grew 4.2% year over year, and now represent 49% of our total revenues.

Strength in strategic products, such as high speed internet, high bandwidth data services, Prism TV, and managed hosting services, continues to drive this growth.

Third quarter 2013 cash expenses increased 1.4% from the year ago period, driven primarily by higher professional fees and non-employee costs, which offset lower personnel-related cost.

Included in third quarter expense was less than $5 million related to the Colorado floods Glen mentioned earlier.

We have also incurred less than $10 million of flood-related expense during the month of October.

We generated strong operating cash flow of approximately $1.81 billion for the third quarter, and achieved an operating cash flow margin of 40%.

As we move toward revenue stability, we do expect continued pressure on operating cash flow.

As the revenue mix shifts to lower margin products, we near the full achievement of operating expense synergies related to the Qwest acquisition.

And lastly, we continue to make investments in strategic areas to drive future growth.

Adjusted diluted earnings per share for third quarter was $0.63.

As we have discussed on prior earnings calls, adjusted diluted EPS excludes special items and certain non-cash purchase accounting adjustments, as outlined in our press release and associated supplemental financial schedules.

Additionally, we generated $761 million of free cash flow during the quarter, which is defined as operating cash flow less cash paid for taxes, interest, and capital expenditures, and additional adjustments to other income.

Our strong cash flows continue to provide us with the financial strength and flexibility to meet our business objectives and drive long-term shareholder value.

Now turning to slide 13, the 1.2% decline in third quarter 2013 operating revenues, compared to third quarter a year ago, was primarily the result of growth in strategic revenues that was more than offset by lower legacy revenues due to access line losses and lower minutes of use.

The growth in our strategic revenues was primarily driven by strength in high speed internet, high bandwidth business data services, Prism TV, and data hosting services.

Now turning to slide 14, I'll discuss each of our operating segments, beginning first with the consumer segment.

Consumer generated $1.5 billion in operating revenues, which represents a decrease of 2.1% over third quarter a year ago.

Our strategic revenues in this segment grew 6.8% year over year to $644 million, driven by growth in high speed internet and Prism customers and price increases.

The long-term growth rate at high speed internet is likely to slow over time, due to our growth in penetration of households.

Legacy services revenues for the segment declined 8% from third quarter 2012, due primarily to a continuing decline in access line and long distance revenues, partially mitigated by an increase in the access recovery charge.

Expenses in this segment declined $5 million, or approximately 1% during the third quarter, compared to the same period a year ago, driven primarily by lower employee-related costs, which were partially offset by higher Prism TV costs.

Moving to slide 15, our business segment generated $1.54 billion in operating revenues during the third quarter, which were flat with the same period a year ago.

On a sequential basis, total revenues grew 1.2% from second quarter 2013.

Our third quarter strategic revenues for the segment increased by 6.3% to $640 million from third quarter a year ago, driven primarily by strength in high bandwidth services such as MPLS, Ethernet, and Wavelength.

Excluding low bandwidth services, strategic revenue grew nearly 9% from a year ago.

We continue to generate solid growth across the enterprise customer segments, and we see an opportunity for further investment in the small and mid-sized business customer space to improve our market share and drive further growth.

Legacy services revenues for the segment declined 3.8% from third quarter 2012, due primarily to a continuing decline in access line and long distance revenues, partially mitigated by an increase in the access recovery charge.

Our total segment expenses increased to $22 million, or 2.4%, driven by higher facility costs, partially offset by lower employee-related and CPE expenses.

Now turning to slide 16, our wholesale segment generated $878 million in operating revenues, a decline of 3.5% from third quarter 2012.

Strategic revenues for wholesale were $563 million, down 1.1% from third quarter 2012, as declining low speed transport services revenue offset growth in Ethernet services and data bandwidth capacity expansion by wireless carriers.

Our legacy revenues in this segment declined by 7.6% to $315 million, reflecting the continued decline in access and long distance minutes of use and the implementation of lower access rates under the CAF Order rate step down.

Our operating expenses for the quarter were $293 million, 3.6% below the same period from a year ago, driven primarily by lower personnel-related and facilities costs.

Moving to slide 17, and our data hosting segment, which includes all co-location, managed hosting, cloud services and hosting related network services revenues.

This segment generated $342 million in operating revenues, representing an increase of 4.6% from third quarter 2012 revenues of $327 million.

Third quarter 2013 revenues include approximately $14 million of revenue contribution from the Cyber IT outsourcing assets we acquired in October 2012.

Data hosting year-over-year revenue growth was weakened by the impact of large client bankruptcy-related churn and price erosion in previous quarters.

Data hosting operating expenses were $274 million in the third quarter, compared to $246 million in third quarter a year ago.

This 11% increase is driven primarily by higher employee cost related to the Cyber and AppFog acquisitions that were not present in the prior period.

Despite recent weakness, we expect long-term improvement in both revenue and margin trends across the data hosting segment, and continue to leverage these assets to drive additional revenue through cross-selling and opportunities in our other segments.

Turning to slide 18, we provide our fourth quarter 2013 guidance.

For the fourth quarter of this year, we expect total operating revenues of $4.5 billion to $4.55 billion, our core revenues of $4.07 billion to $4.12 billion, and operating cash flow between $1.75 billion and $1.8 billion.

Adjusted diluted EPS is expected to range from $0.55 to $0.60.

Our fourth quarter expenses are expected to increase from third quarter 2013, primarily due to higher data integration costs related to increased CPE sales.

That concludes our prepared remarks for the day, so at this time, I will ask the operator to provide instructions for the Q&A portion of the call.

(Operator instructions)

David Barden from Bank of America.

Hello guys, thanks for taking the questions.

I guess my first question is, if you could go into, because you might imagine, lots more detail about what's going on in the data center business?

I think two things.

One is, on the write down, clearly there is some amount of growth rate in the future that you don't think you are going to achieve that you thought you were going to achieve.

So if you kind of address what the difference in that growth rate is?

And then second, on the quarter to quarter performance, it looks like the managed hosting business went down $5 million.

If you could talk about some of these credits and other things that occurred?

And I think Glen, you mentioned that the data hosting business should grow half over half, but it could still go down next quarter and grow half over half.

So if you guys could give us a little bit more sense as to what the expectation here is.

Last quarter, we were still expecting this business to grow high single digits.

So it seems like something really went off the rails in the quarter.

I think on the other side of the coin, Stewart, the mid point of the revenue guidance is actually the highest revenue that you guys would have had pretty much for the whole year.

And you guys have been talking down revenue growth expectations, I think, in terms of 2014.

But it feels like we are finding some kind of level.

So could you talk about, even with the data center business not performing, it does feel like we are flattening out in the revenue curve.

And could you revisit what the puts and takes are for getting to revenue growth in 2014?

Thanks.

David, this is Glen.

I will field those, and I'll get Jeff to help out on a couple of items.

But to get to your question about the quarter, in the fourth quarter we do expect growth.

It won't be negative is our expectations, anyway.

We expect to see growth in the fourth quarter, sequential growth, in the 2.5% to 3% range is our target is for the fourth quarter.

If you look at this past quarter, we had a number of one time items.

First, we had a currency issue of a little under $2 million.

We had -- right at $2 million.

We had a couple of prior year adjustments in there around $3 million.

The big item really was the churn out of the old Qwest centers.

We had some very large customers who were pure co-lo customers.

Some very large -- you'd know the names well, I won't call them, who took their business to their internal data centers.

These were very large folks who have a huge amount of data out there.

So that's the big -- they weren't buying any cloud and managed services from us.

Pure co-lo.

So that is where a lot of that churn came from.

Plus we had the bankruptcy of Kodak impacted us by about $3 million.

So it was a combination of things in the quarter.

We do expect to turn that growth around.

I am confident that we can drive growth in the hosting business.

We are seeing significant success in our cross selling efforts.

We changed our go to market with our network customers, seeing very strong demand.

Our sales, as we have talked about, are continue strong into the fourth quarter for the last three quarters in a row, we have had strong bookings.

And these -- the data hosting assets are really important to our future growth.

They supported by analysts, of course, industry analysts regarding the trends toward IT outsourcing.

We believe those are real.

We have work to do in making some of our changes in some of our go to market work, and our focus on certain verticals.

Strategically, these are very important assets for us, and we see that is where the marketplace is going, over time.

And I'm confident we can grow this business.

I'll let Jeff make a few comments on his view here.

Sure.

David, Jeff Von Deylen.

As we went into the quarter, we expected Q3 would be flat to Q2.

Q2, there was some nonrecurring revenue.

But anyway, we got surprised by the $5 million.

I think Glen talked about that.

From a new sales perspective, we were in line with new sales, really.

We had the same level of new sales in Q3 as we did in Q2.

And as Glen mentioned, probably the biggest success we are having is selling into some of the CenturyLink network customers who don't buy hosting today, so they are not part of that legacy Qwest hosting base.

But they are buying the new products.

So we really think the combination of some of these one time items getting behind us after the third quarter, is why we think the 2.5% to 3% total hosting growth is reasonable.

And that's the result of the sales.

I will say the quarter's impact has also negatively impacted our network, our other network, as we call it, or the wide area, the VPN network was negative year over year.

If you take that out, you just focused on the hosting revenue, year over year, without the credits, we're about 8.6% growth.

So a little better than that reported 4%.

But -- and we feel like, going forward, some of these one time credits are out of the way, and we are poised to grow sequentially.

Again, a question on the goodwill write down and how we are -- how we think about that.

Stewart, if you want to take that one?

Yes.

Because this is about future growth rates.

So in terms of the goodwill write down, David, we just basically, because of our past performance, we decided we needed to take down the, just from an accounting standpoint, take down the assumed growth rates that we were using, going forward, for purposes of calculating the value of the business and comparing that with the amounts that is reflected on the books, and decided we needed to go ahead and write it down.

We certainly believe, as Glen pointed out, in the value of this business going forward, and we believe that we can get to growth rates that will -- and if you look at market comps, basically, there is more value there than we wrote it down to, really.

So we feel comfortable with that.

I think we are conservative in the write-down that we took, and hopefully we're conservative in the projections that we used to calculate that.

Your question concerning the revenue guidance, and feels like we are getting -- finding some level of flattening revenue curve.

So basically yes, we are continuing to get towards and move towards flat revenue.

We -- it is a little slower than we thought it would be a few quarters ago, and that is why we said last quarter we didn't think we'd get to flat revenue in 2014.

But basically, it is dependent on the continued growth in strategic revenue.

The data hosting business is a big part of that.

Our IPTV revenue and success there that we are seeing there is a big part of that, and continued success in our business sector with the MPLS revenue that we are driving there and the new customer growth we are driving there.

We are having some really good success there.

And if we can bring the success that we are seeing in the large customer segment -- large and enterprise customer segment down to the small and midsize segment, it will certainly help us get there quicker.

The other place is basically just our high speed internet.

We need to continue to do well, from the standpoint of adding customers, and hopefully increasing rates a little bit, over time, as we were able to do in the third quarter.

Okay.

And just a follow-up, quick.

When you are looking for the data center 2.5% to 3% growth, is that year over year or sequential?

Sequential.

All right, guys.

Thanks a lot.

Simon Flannery from Morgan Stanley.

Thanks very much.

Could you dig a little bit more into the broadband numbers?

You had a very nice snap back.

Obviously some of that was seasonality.

But did you change your go to market?

Was that driven by promotions?

Is this the sort of level we think is sustainable over the next couple of quarters?

And capital intensity continues to move up into the sort of mid to high teens.

As the fiber to the tower build slows, when do you think we sort of see a peak in that capital intensity?

Are we seeing it right now, or are we going to maintain it for another year or so?

Thanks.

Simon, Karen Puckett.

In terms of the broadband bounce back, we are pleased about that, obviously.

I would say no new go to market.

We continue to execute.

We do this well, and so the seasonality helps.

Also, we were able to overcome the indirect part, and we spoke about last time with some digital partners that we had, helping them increase their business and our call center channel performed very well.

As well as getting very focused on our go to market in terms of our prospect leads and making sure that those are all optimized.

So the things that we normally do, we continue to do well and had a good quarter from that.

Simon, regarding the capital budget, we expect CapEx, even though we do expect the fiber to tower spend to go down, we believe we will -- our budget will stay in the range -- in this $3 billion range that we have been talking about.

It could be a little plus or minus either side of that, but that is the range we expect to be in.

Because of the opportunities we think we have in broadband expansion driving additional revenue opportunities.

Also a lot of the success based -- about a third of our budget will be success based capital.

So if we continue to be successful in Ethernet, MPLS, work, and the Savvis sales data center expansion, then a lot of that will be success based.

So we expect to be in this range -- stay in this $3 billion range at least through 2014.

Thank you.

Batya Levi from UBS.

First, a follow-up question on the data hosting business.

I think a couple of months ago, you had mentioned that we will see some pick up in churn in the first quarter of 2014.

With the churn we saw in the quarter, was that pulled forward?

Or do you expect another pick up in churn in the beginning of the year?

The second question is on the business revenues.

We saw some slight improvement year over year growth in that business.

Do you expect that to continue?

Thanks.

Yes, it is Jeff.

Regarding the churn, the $2 million that we referenced on legacy Qwest, that was a surprise.

So that was over and above what we had forecasted.

And we don't have, in our current view of Q1 -- or Q4/Q1, any more large churn, any higher than where we currently run.

So that $2 million that we referenced, or that Glen referenced in this quarter was over and above what we expected.

But then as we go forward to Q4/Q1, we expect to have that normal level of churn, which we currently run in the 1.3% to 1.5% of revenue.

And Batya, on the business revenue growth, we do hope to continue to improve our business revenue growth.

Some of it in the third quarter related to some price increases that we did, but -- some small amount of it.

But we are, again, seeing good success on the large, multi-node MPLS networks and strategic data revenue growth that we are seeing in our business sector.

Thanks.

Scott Goldman from Goldman Sachs.

Thanks.

Good afternoon, guys.

I guess I want to follow-up on David's question earlier, and looking at the 4Q guide you have laid out for -- really for both revenue and for EBITDA.

If you look where you came in 3Q, fairly close to the midpoint of your guide there.

But it looks as though you are bringing down full year guide by about $50 million or so at the midpoint, for both revenue and EBITDA, if we take your 4Q numbers there.

So wondering if you could just talk a little bit about the puts and takes that we should be thinking about?

I know you highlighted CPE.

But anything else we should be thinking about, Stewart, as we go forward on that?

And then secondly, obviously seeing good results on Prism IPTV, and market expansion, and the quality churn implications and HSI attach rates that you get there.

Just wondering how you think about the opportunity to maybe accelerate that, either within the existing CapEx budget or even a willingness to move CapEx a little bit higher, just given the benefits of that product?

Yes, so Scott, in terms of fourth quarter guidance.

Yes, considering the guidance that we have for full year and the performance in the third quarter, and our guidance that we gave in fourth quarter, we'll probably be somewhere around the midpoint to the lower end of the guidance that we gave for revenue and operating cash flow for the full year.

So yes, we'll be to the midpoint or slightly below, and we feel good about that.

There are some -- we do expect an increase in our CPE sales in the fourth quarter, and the associated costs with that, since that is a low margin product.

In terms of Prism and broadband?

Yes, I'll just talk about Prism for a minute.

The -- we are continuing to build out in markets where we are, so we still have some other phases going in Phoenix and in Colorado Springs, as well as in Omaha.

There -- and other areas where we are building out -- continue to build out in those markets.

As we continue to see success there, if we -- if this growth continues, we will consider expanding into other markets.

That will be part of our 2014 budget process that we are in the process of going through now, and we'll be considering those expansions.

As far as increasing the budget, we don't expect significant increases in the budget -- capital budget to build out a Prism release in 2014, but that is an opportunity for us as we look -- if this -- we continue to see success here as an opportunity to really consider acceleration of a build out in the months and years ahead.

Stewart, just one follow-up to the guidance.

Anything we should be thinking about in terms of the new union contract?

How that layers in in 4Q into 2014 that would impact or benefit you on the EBITDA side, come 4Q?

Yes.

Not much impact in the fourth quarter.

We should see some positive benefits in the first quarter, and full year 2014.

Okay.

Tim Horan from Oppenheimer

Thanks, guys.

Two questions.

Where do you think your pricing is on the data center side versus market and versus legacy?

And are you seeing much overbuild in the markets that you are in?

Or is it more just the internet companies going to their own facilities?

Secondly, on the GPON strategy.

Could you maybe just give a little bit more detail on how it compares and contrasts to what Verizon did with FiOS and maybe a little bit of color on the cost structure on that?

It seems like a very large opportunity, and I know Omaha, you had lost a -- they had lost a lot of market share, historically.

Maybe if you can some color on what kind of upticks you are getting in your trials there?

Thanks.

Sure.

First of all, on the data center side, specifically as it relates to co-location, I think our legacy base, certainly any pricing over the last few years has probably declined in the 10% to 15% range.

So some of those clients that are coming up for renewal on just pure co-location, we have to -- we see that in price erosion.

You are right.

Some of the larger you know [big eye] content kind of guys who built their own data centers and look at choices of where to put their environment.

And we have had that in -- certainly in our numbers negatively impacted.

I will say, there is probably a couple of markets that we think may be -- are more competitive or price competitive than not in terms of DC, Santa Clara and Dallas.

But those are markets that we are -- the good news is we are pretty well distributed, and where we are adding footprint is probably away from those markets where we see some of the wholesalers and other demand going.

And then the last point is, we are really trying to take advantage of this embedded base of customers who -- that Karen really has in her channel, and our ability to sell data center and even simple co-locations racks and bundles to those customers that they have never had that offer before.

And we think that is going to really help us deemphasize some of the larger 1 megawatt and above kind of deals to really an enterprise and smaller opportunities.

Tim, Karen.

On the GPON question, in terms of just Omaha, if you think about that, we had fiber deployed in that core of the network, so it made sense to do GPON.

And what we are attempting to do here is really understand the market with the GPON message, take rates and such, as well as harden our process.

Because it is somewhat of a new process for our systems and in our organization.

I will tell you we are very pleased.

We have not officially even hard launched.

We are still in the soft launch in Omaha.

So very pleased with the results, both from a consumer and a business standpoint.

So encouraged in every operating metric.

The biggest, we had some fiber to the curb technology, so we had the fiber.

And we decided to use the most recent GPON capability to enable that, again, to trial -- to further harden process in a legacy seed side in terms of those systems and processes.

Our focus is very targeted, in terms of going after the high addressable market and consumer, so the premium kind of customers.

But very focused on the business side, too, and you'll hear more of that here in the coming quarters as our focus on GPON with business.

Thank you.

Our final question for today comes from Michael Rollins from Citi.

Hi, thanks for taking the question.

Was wondering if you could talk a little bit about what's going on in the cost base, and especially relative to revenue.

So it seems like the segments that grew in the quarter right -- how to phrase it?

Year over year, they grew, like the business segment, data hosting segment.

That is where you actually saw segment income decline year over year.

And in aggregate, if you just look at the segment income, or even take it to the larger consolidated EBITDA level, it looks like EBITDA was down by more than a $1 year over year for every $1 of revenue loss.

So was just wondering if you could talk to us about how to think about the change in revenue, relative to change in EBITDA?

And whether that can get better over time?

And if there are any specific issues that were impacting this quarter more so than usual?

Thanks.

Yes, Mike, what you are seeing is a combination of really two major things that are going on.

One, we are cycling through, or have pretty much cycled through, the synergies related to Qwest, so we are not seeing the offsets to expense increases that we have been having, really all along, related to how our network services really and charges related to business customer growth.

And some of that was offset in the past, related to synergies that we were achieving from Qwest.

Also, secondly, in the third quarter, we do have some seasonality from a cost standpoint.

So we get a chance to do maintenance on our networks and things like that.

So that really drives our costs up some, and our power costs are higher in the third quarter, simply because of the heat and the cooling required, things like that.

The other is that basically, we have new initiatives where we are rolling out new products, and there are costs associated with that, really, that aren't -- there is not a lot of revenue benefit there in the early stages in rolling out new products.

So I think that you are seeing some of that, too.

We should -- we would expect for, other than the Qwest synergies, for the other expenses to be more in line with the revenue growth in the future, though.

Thanks.

I'm showing no further questions at this time.

I would like to hand the conference back over to Mr. Glen Post for any closing remarks.

Thank you, Said.

Please turn to slide 21 as we close today's call.

Overall, we are well pleased with our results for the third quarter.

We believe our continued investment in key strategic opportunities will help us drive revenue growth and strong financial results over time.

We are seeing strong demand from business customers for our advanced network and hosting IT solutions, and we are seeing -- also seeing improved sales success through increased collaboration among our business and data hosting sales leaders around the joint development of targeted innovative solutions.

Our new bundled offers have positioned us to capture additional spend in the IT services space of our customers' portfolios.

We -- for example, our managed office product is a simple, fully managed bundle solution, was created specifically for small and commercial businesses and integrate all elements of their communications network, managed data, hosted managed voice, and managed applications.

We believe that these types of products and bundles that we are developing can be very effective in driving future revenue streams and make our -- develop a lot of customer loyalty.

Overall, we believe we are well positioned to effectively compete and drive revenue growth from our strategic products and services in the months and years ahead.

Thank you for joining our call today, and we look forward to speaking with you in the weeks ahead.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes our program for today.

You may all disconnect, and have a wonderful day.