Lumen Technologies Inc (LUMN) 2013 Q4 法說會逐字稿

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

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded.

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

Mr. Davis, you may begin.

Thank you, Sayid.

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

Before we begin, let me apologize for the delay in the start of the call today.

However, we had a pretty severe ice storm move through the area in the last 24 hours, closing a number of bridges, overpasses, and roadways.

As a result, we are normally all in the room together doing this call from one location, but we are not today.

So bear with us as the hand offs may not be quite as crisp as they normally are, and thank you for your patience as we get started today.

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 first-quarter 2014, full-year 2014, 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.

You'll 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 on our website at www.centurylink.com.

Now turning to slide 3, your host on 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, Karen Puckett, CenturyLink's Chief Operating Officer; Bill Cheek, President of Wholesale Operations; and Jeff Von Deylen, President of CenturyLink Technology Solutions, formerly known as Savvis.

Our call today will be available for telephone replay through February 19, 2014, and the webcast replay through March 5, 2014.

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 February 12, 2013 -- excuse me, 2014, and should be considered valid only as of this date, regardless of the date heard or viewed.

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

Glen?

Thank you, Tony, and good afternoon, everyone.

Thank you for joining us today.

I am one of the ones who is iced in.

I'm working from my home, so we will try to make this as smooth as we can, Stewart and Karen and Jeff.

If you will turn to slide 5, I'd like to start off by recapping our performance for 2013.

During the year, we continue to effectively execute our objectives and make investments that we believe will lead to revenue stability.

For the full-year 2013, total revenue declined by 1.5% compared to 2012.

In 2013, our core revenues trend continued to improve from a 2.3% annual decline in 2012, to a 1.3% annual decline in 2013.

This continued revenue improvement was driven by nearly a $400 million increase in strategic revenues, primarily due to growth in broadband, Prism TV, and high-bandwidth data services, and hosting services.

Now, the annual strategic revenue growth was driven in part by a 13.4% improvement in MPLS, or growth in MPLS, Ethernet, and wavelength revenues.

Additionally, the decline of legacy revenues has slowed from 8.4% in 2012 to 7.3% in 2013.

We achieved solid growth in both high-speed Internet and Prism TV subscribers throughout the year, adding 140,000 HSI customers and 69,000 Prism TV subscribers.

We've been pleased with the early growth of Prism TV subscribers in new legacy Qwest markets, where we lost Prism in 2013.

Throughout the year, we invested to improve broadband speed availability across our footprint.

We grew the number of enabled access line, receiving 20 megabits and 40 megabits each by approximately 25% over the prior year.

Also, we continued to focus on developing more fiber, deploying more fiber to multi-tenant buildings and expanded the program by approximately 1,000 buildings during the year.

We have continued to make excellent progress under our $2 billion stock repurchase program authorized by our Board in mid-February of last year.

During the fourth quarter, we repurchased 10.5 million shares for a total investment of $331 million.

From the inception of the program in February of 2013 through February 11, 2014, we have completed 86% of the $2 billion program, having purchased a total of 50.8 million shares for $1.72 billion.

We currently expect to complete the remainder of the current $2 billion stock repurchase program during the second quarter of 2014, well ahead of the original two-year timeframe.

Based on this anticipated early completion of our stock -- current stock repurchase program, the current level of our stock price, and the strong free cash flow we believe we will generate during 2014, management expects to recommend to our Board that they approve a follow-on stock repurchase authorization at our regularly scheduled meeting later this month.

This, of course, would position us to continue to opportunistically repurchase shares, return additional free cash to shareholders once our current stock repurchase program is completed.

Over the last few weeks, our investor relations team has heard from the investment community that some investors are stating CenturyLink's dividend is not sustainable.

Obviously, that concerns us.

I want to clearly address the sustainability of our dividend before making further comments.

We remain confident that the investment in our key strategic initiatives continue to position us to reach revenue stability in 2015, and establish a revenue growth trend soon thereafter.

Our strong fourth-quarter and solid full-year 2013 results, along with our full-year 2014 revenue guidance show that we have made and that we anticipate continuing to make progress toward reaching our revenue objectives.

Additionally, we expect to successfully align our operating cost with our future revenue streams to continue to generate solid, predictable cash flows in the years ahead.

We believe in our growth opportunities, and we also know that we must improve our operational efficiencies to mitigate the impact of the revenue mix shift on our operational cash flow and free cash flow over time.

We believe this improving revenue trend, along with the strategic opportunities in the marketplace position us well for future revenue growth and cash generation.

These are the key reasons we believe that our dividend is sustainable and that our payout ratio will remain at a reasonable level, even as we begin to pay higher cash taxes in the future.

If you will turn to slide 6, and I will provide an update on our key strategic initiatives.

Throughout the year, we have diligently executed in the four key strategic initiatives we initially laid out in third quarter of 2011.

We believe our investment in these strategies continue to strengthen our overall product portfolio, which further positions CenturyLink as a leading integrated provider of global network, data hosting, and cloud solutions.

Starting with broadband expansion and enhancement, 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 6 million broadband customers.

We've got a strong fourth quarter, adding nearly 49,000 new subscribers, and we believe our fiber assets, including approximately 240,000 fiber route miles across the US, position us well in the business market.

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

We had 200 fiber-fed buildings in the quarter, increasing the number of fiber-fed buildings by 17% for the third quarter.

This program offers broadband capabilities of up to 1 gigabit of symmetrical service, and it enhances cloud connectivity for these business customers.

We have made very good progress over the past few years in cost-effectively deploying broadband services.

We have enabled a total of nearly 8 million homes with fiber to the node and have passed a total of approximately 2 million homes with Prism TV capabilities.

We have utilized and continue to utilize a balanced capital investment approach, including gigabit fiber, VDSL2, and pair-bonding deployments to efficiently enable higher speeds and enhance services to consumers and businesses in our markets.

This balanced investment strategy has allowed us to deliver very competitive broadband speeds, including up to 1 gigabit service in a number of areas in an efficient manner and to continue to drive broadband penetration.

Early results from our 1 gigabit pilots in Omaha and Las Vegas have met or exceeded our expectations, and are good indicators that by coupling GPON technology, gigabit enablement with expansion of fiber to the node and Prism TV deployment, we can successfully compete and meet the broadband needs of both consumer and business customers.

Our announcement last week regarding delivery of up to 1 gigabit service to more than 2,500 Salt Lake City businesses located in multi-tenant unit office buildings for them to use is an example of how we are leveraging our existing fiber to opportunistically expand speed and service capabilities to high-value business and consumer customers.

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

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

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

We currently cover over 2.3 million business locations with Ethernet capability, with nearly half of this footprint capable of 20 megabits and higher symmetrical speeds.

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 to slide 7, 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 the service.

We added a record 26,000 Prism TV subscribers during the fourth quarter, ending with a total of 175,000 subscribers in service.

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

This quarter we experienced an attachment rate of 98%.

We continued to expand the footprint where Prism service is available, and in fourth quarter, we added approximately 180,000 addressable homes, of which just over half are in the newly lost markets of Phoenix, Colorado Springs, Omaha, and Denver.

We are very pleased with the early Prism subscriber growth in these first Qwest markets to provide this video service.

We continue to see our churn rates improve with Prism triple-play bundled customers.

[Where the] bundled customers are less likely to churn than single-play voice customers.

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

Continuing on to slide 8, during the fourth quarter, we completed approximately 930 fiber to the tower builds, for a total of 4,100 fiber builds in 2013, and over 18,800 total fiber-connected towers across our footprint.

In 2014, we expect to complete a total of 3,000 to 3,500 fiber builds.

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

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

Moving to slide 9, in managed hosting and cloud services, we continue to believe we are well-positioned to capitalize on long-term growth opportunities in this space where we've developed and are expanding our strong product offerings.

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

Sales of hosting services to network business customer base has grown significantly in fourth quarter.

We expect to maintain this momentum as customers seek IT solutions to streamline their operations, increase efficiency, and reduce cost.

We are focused on growing hosting sales from our large base of business network customers, and expanding our hosting demand generation across target customer segments.

While we expect to have some churn of larger colocation clients, we expect the new initiatives to continue to drive growth.

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.

In the fourth quarter, we opened a new data center in Hong Kong, and we announced in late November, the acquisition of Tier 3, an innovative provider of public cloud services.

Tier 3's products, road map, and vision are now the foundation of CenturyLink's cloud development strategy.

We believe Tier 3's public, multi-tenant cloud platform, combined with our global network and data center footprint and managed services team will greatly enhance our service capabilities to businesses of all sizes.

Additionally in January this year, Savvis began operating as CenturyLink Technology Solutions, aligning the brand with CenturyLink and demonstrating deeper ties to the broadband portfolio of IT solutions delivered to businesses.

Turning to slide 10, I'd like to shift briefly from 2013 achievements to looking ahead at our priorities for 2014.

We were pleased with the strong consumer metrics generated in 2013, as we achieved high-speed Internet and Prism TV subscriber growth.

As we enter 2014, we expect to continue investing to enable higher broadband speeds and to drive further broadband penetration across our markets.

During 2013, we enabled Prism TV service to approximately 800,000 incremental households, primarily driven by our launch of Phoenix, Colorado Springs, and Omaha during the year.

We expect to continue to expand our Prism TV addressable market during 2014 and to drive subscriber growth during the year, driven by the expanded and addressable market improvements in our programming packages and the continued improvement in the customer experience.

We also will continue to monitor our success in all of our Prism TV markets, including Highlands Ranch, Colorado, a suburb of Denver.

We launched service late last year, and may consider further expansion of our Prism markets if our results continue to be strong.

With our customer retention programs, we continued to refine a series of programs targeting our highest value customers focused on high-speed Internet, voice, and Prism TV services.

We also extended programs focused on new customer outreach, auto-pay take rates, and overall higher-quality sales during the year.

In our business segment, we will continue to focus on driving growth in sales of high bandwidth data services, including MPLS, Ethernet, and wavelength to meet strong customer demand.

We believe our targeted marketing approach and sales programs, as well as continued enhancements in our product portfolio continue to position us to drive revenue growth.

Based on early sales results associated with our recent launch of Managed Office, we will continue to grow and expand these [by-the-seat] solutions to meet market demand and gain market share.

We also expect to continue to expand our GPON and fiber deployment to buildings, provide expanded addressable market opportunities to our business sales team.

In our wholesale segment, we will continue to expand our fiber deployment to wireless towers, continue to drive revenue growth from the continued market demand from wireless carriers for wireless data backhaul.

However, we expect our 2014 expansion pace to be below that of the last few years.

Utilizing the capabilities of CenturyLink Technology Solutions and the recent acquisition of Tier 3, we also expect to expand our marketing of white-label cloud services on a wholesale basis, enabling us to drive further growth in cloud services in the coming year.

In the data hosting segment, we will migrate it to a single platform that are Tier 3 for all cloud and managed services, which will enable us -- enable new capabilities that further differentiates CenturyLink in the market and enhance customer experience.

Further, we will meet customer needs by selling a full portfolio of colocation cloud and managed hosting services, while retaining existing customers through exceptional service.

Lastly, we expect to identify key partners that will help expand our capabilities beyond our direct sales force and drive additional revenues there, as well.

Overall, I'm pleased with the solid results for the quarter and the full year.

We continue to invest to drive growth, and we are experiencing good traction in those key areas.

With that, I will turn the call over to Stewart for an in-depth look at our financial results and guidance.

Stewart?

Thank you, Glen.

I'll spend the next few minutes reviewing the financial highlights from the fourth quarter, and then conclude my remarks with an overview of the first-quarter and full-year 2014 guidance we included in our earnings release issued earlier this afternoon.

Beginning on slide 12, I'd like to review some highlights from our strong fourth-quarter results.

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 $4.54 billion on a consolidated basis, a 0.9% decline from fourth quarter a year ago.

Core revenues, defined as strategic revenues plus our legacy revenues, were $4.11 billion for fourth quarter, a decline of 0.4% from the year-ago period.

Strategic revenues grew 5.4% year over year and represent 50% of our total revenues compared to 47% a year ago.

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

As Glen mentioned earlier, subscriber growth was strong for both broadband and Prism TV.

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

We generated strong operating cash flow of approximately $1.84 billion, for the fourth quarter and achieved an operating cash flow margin of 40.4%.

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.

Adjusted diluted earnings per share for the fourth quarter was $0.68, well ahead of the midpoint of our guidance of $0.58.

Results included the benefit of certain favorable year-end operating expense adjustments related to employee benefits, operating and income taxes.

Normalizing for these items, operating expenses would be approximately $60 million higher, and adjusted diluted EPS would be $0.59, above the midpoint of our guidance range for both operating cash flow and adjusted diluted EPS.

Additionally, we generated $601 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 the financial strength and flexibility to meet our business objectives and drive long-term shareholder value.

Also during the quarter, we made a strong progress on the share repurchase program, buying 10.5 million shares for $331 million.

Now, turning to slide 13, the 0.9% decline in fourth-quarter 2013 operating revenues compared to fourth-quarter 2012 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, we will discuss each of our operating segments, beginning first with the consumer segment.

Consumer generated nearly $1.5 billion in operating revenues, which represents a decrease of 1.7% over fourth quarter a year ago.

Our strategic revenues in this segment grew 7.7% year over year to $683 million, driven by growth in high-speed Internet and Prism subscribers and the full-quarter impact of price increases.

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

Legacy services revenues for the segment declined 8.4% from fourth-quarter 2012, due primarily to a continuing decline in access line and long-distance revenues.

Expenses were essentially flat compared to the same period a year ago, driven mainly by lower employee-related costs, which were partially offset by higher Prism TV cost.

Moving to slide 15, our business segment generated $1.56 billion in operating revenues during the fourth quarter, which increased $16 million, or 1% from the same period a year ago.

On a sequential basis, total revenues grew $19 million from third-quarter 2013, primarily driven by higher CPE revenue.

Fourth-quarter strategic revenues for the segment increased by 7.5%, to $643 million from fourth-quarter 2012, driven primarily by strength in high bandwidth services, such as MPLS, Ethernet, and wavelength.

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

Legacy services revenues for the segment declined 3.5% from fourth quarter a year ago, due primarily to a continuing decline in access line and long-distance revenues.

Total segment expenses increased $39 million, or 4.1%, driven by higher facility cost associated with our MPLS product growth.

Now, turning to slide 16, our wholesale segment generated $884 million in operating revenues, a decline of 2.5% from fourth quarter a year ago.

Strategic revenues for wholesale were $581 million, which grew 6 -- 1.6% from fourth-quarter 2012, as growth in Ethernet services and data bandwidth capacity expansion by wireless carriers and delays in TDM disconnects offset the decline in low-speed transport services revenue.

Legacy revenues declined by 9.6% to $303 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.

Operating expenses for the quarter were $290 million, or 3.7% below the same period from prior year, driven primarily by lower voice usage costs.

Now, moving to slide 17 and our data hosting segment, which includes all colocation, managed hosting, cloud and hosting-related network services revenues.

This segment generated $353 million in operating revenues, representing an increase of 3.8% from fourth-quarter 2012 revenues of $340 million.

Year over year, managed hosting revenues, including cloud, grew 14%.

Colocation growth of 1.4% was weakened by customer churn and price erosion in previous quarters.

Data hosting operating expenses were $283 million in fourth quarter, compared to $264 million in fourth-quarter 2012.

This 7.2% increase is primarily due to increased sales costs, the Tier 3 and AppFog acquisitions, and incremental expenses associated with them and investments in marketing.

Over time, 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 opportunities in our other segments.

On slide 18, we provide our first-quarter 2014 guidance.

We expect guidance -- we expect for the first-quarter 2014, operating revenues and operating cash flow to decrease compared to fourth-quarter 2013, primarily due to a decline in legacy and data-integration revenues, along with favorable employee benefits and operating tax true-ups present in fourth-quarter 2013 results that are not expected to reoccur in first quarter 2014.

Similar to last year, we also anticipate a decline in depreciation and amortization expense in the fourth quarter of 2014, driven primarily by the impact of declining amortization of acquisition-related intangible assets, and the annual review and update of depreciation rates.

For first-quarter 2014, CenturyLink projects total operating revenues of $4.46 billion to $4.51 billion, our core revenues of $4.07 billion to $4.12 billion, and operating cash flow between $1.73 billion of $1.78 billion.

Adjusted diluted EPS is expected to range from $0.58 to $0.63.

On slide 19, we provide our full-year 2014 guidance.

For the full-year 2014, we expect total operating revenues of $17.9 billion to $18.1 billion, reflecting a year-over-year revenue change of flat to negative 1.2%, and core revenues of $16.25 billion to $16.45 billion.

Operating cash flow is expected to be between $7.05 billion and $7.25 billion, and adjusted diluted EPS is expected to be between $2.40 to $2.60.

Our capital expenditures are expected to be approximately $3 billion, as we continue to make investments in key growth areas.

So, we anticipate free cash flow for full-year 2014 to be between $2.6 billion and $2.8 billion.

The anticipated decline in operating cash flow and free cash flow, primarily driven by the decline in legacy revenue, investments to continue to grow strategic revenues, as well as a lower level of acquisition-related synergies in 2014, compared to the level of incremental synergies that we achieved in 2013.

That concludes our prepared remarks for the day.

At this time, I will ask the operator to provide instructions for the Q&A portion of the call.

Thank you, sir.

(Operator Instructions)

David Barden from Bank of America.

Good quarter.

I want to talk first a little bit about the guidance, Stewart, if I could.

First, the full-year midpoint is looking for a margin of around 39.7%, which is a higher margin than you had in fourth quarter, a higher margin than you are guiding to in first quarter.

So, if you could step us through where that margin expansion and where the pivot starts to occur, that would be helpful.

The second thing that would be helpful is last year, around the middle of the year, there were challenges to the guidance numbers and hitting those numbers.

Could you talk a little bit about the process that you went through for setting these expectations here now, and some of the base case expectations that you made around the enterprise environment and other things?

Lastly, if I could, you talk about, as we all know, the following revenues in legacy have higher margins than the growing revenues in strategic services do.

You've also talked about the potential for a pivot in EBITDA around the time, about a year following the pivot in revenue growth.

Could you put numbers around those margin numbers?

If you're having a conversation with someone and they say, legacy revenues are X, and strategic revenues are Y, at what margins can we have a conversation about that and think about when the EBITDA pivot can occur?

Thank you.

David, first of all, the full-year guidance midpoint, basically, is 39.7%.

The midpoint in the first quarter is 39.1%.

Obviously, we expect the latter three quarters of the year to be above that.

We basically have expense reduction programs that we are working to put in place, which will help reduce our expenses from the first quarter expected levels into second, third, and fourth quarter of the year.

Our guidance last year in 2013, if you recall, we had a hockey stick, basically, in revenues.

Where we really missed our guidance in 2013 and came back and tweaked it some, was really associated with the revenue that we hoped to get out of some of the products such as Savvis Direct, which was our cloud product, and another product that just didn't materialize as we had hoped.

We feel like we have all that worked through in 2014 and feel much more comfortable with the revenue guidance in 2014, I think looking back on the experience that we had last year.

So, we feel much better about the guidance there.

Again, on the expense side, we think we have the programs in place and about to put in place, to get us to the point where we need to be there, to hit the guidance.

In terms of the EBITDA pivot, basically, we will continue to lose legacy revenues, but our strategic revenues grew very strong.

The fourth quarter and really full 2013, we expect continued growth in strategic revenues in 2014.

What we've said, is that we are not ready, really, to put a peg in when we can stabilize the EBITDA and turn to EBITDA growth.

But as Glen indicated in his prepared remarks, we do expect to get to revenue stability in 2015.

Okay.

Stewart, just to be clear, I think you have talked about a 12-month lag between the revenue pivot and EBITDA stability.

Are you saying something different now?

Or am I missing it?

Really it's pretty much the same, David.

What we've said, exactly, is hopefully we would get to EBITDA stability shortly thereafter or sometime reasonably thereafter a year or so.

We are not really saying anything different than we've said before.

Okay.

Great.

Thank you, guys.

Phil Cusick from JPMorgan.

Can you talk about a couple things?

One is the 4Q employee cost savings, help us out and help us understand what was there, and I understand it's not going to be there in the first quarter.

As you think about the buyback from here, what's management thinking about in terms of the size of that recommendation?

How should we think about the max leverage on the business going forward?

Thank you.

From a leverage standpoint, we've said that we would like to stay in the 3 times debt to EBITDA or so.

We are at 2.8 times debt to EBITDA now.

I will let Glen talk to the buyback for a moment, and then I will come back to the cost savings.

We are going to the buybacks, the size of the buyback, we really have not discussed that with the Board yet, so I'm not ready to put a number out there.

But we realize it would have to be a significant enough to make a difference and give us an opportunity to buy our stock back at attractive prices, which obviously, we believe the current price is very attractive.

But we are not ready to give a number yet.

We will announce that after the Board meets.

Phil, the employee cost savings were really related to employee benefits.

It was really just making adjustments for -- really all the adjustments related to the full-year 2013.

They revolved around our medical, dental, and vision accruals, basically, for the current-year cost.

They also revolved around some of our post-retirement benefit cost, as we have made adjustments to adjust that to the liability that needed to be at.

We changed our paid time off policy and have fewer hours carried over from year-to-year.

A lot of our people took a lot of time off over the last quarter of the year, so that drove our paid time off expense up.

Then, in addition to that, we had the remainder of -- that's about $40 million or so.

The remainder, or the other $20 million or so is really related to a sales tax -- transaction tax reserve that we had on an acquired company that is no longer necessary.

So we are able to eliminate that reserve, as well as our normal year-end ad valorem tax true-ups for the most part.

That's helpful.

Thank you, guys.

Mike McCormack from Jefferies.

A quick comment, Stewart, regarding the view here, obviously you are discussing the potential for share repurchase.

The competitive landscape for high-speed, obviously, becomes tougher and tougher as cable gets more aggressive on pricing or functionality.

What's your thought regarding balancing the capital budget when you look at 2014 versus thinking about a repo?

If you can give us any color on what you're thinking for cash taxes rolling into the 2014 guide, that would be great.

Thank you.

So, let me hit the last part first, and I will let Karen talk a little bit about competition.

Cash tax is somewhere between $50 million and $100 million in 2014.

The potential for share repurchase is balanced in that with capital budget.

We think we'll have -- our capital budget will be about $3 billion this year, and we think that will give us enough free cash flow to implement -- to complete the share repurchase program that we have in place.

Which we have about $300 million remaining there, and implement another program that we would hope to get -- expect to get the Board to approve at our February meeting in a couple of weeks.

Karen, you want to talk about where we are with respect to high-speed Internet?

Yes, in terms of high-speed Internet, great quarter and congratulations to the central [and cold] team that made that happen.

But, I would say that we have ADSL2 fiber to the [prim] fiber to the node capabilities, and we really do a great job with our local model using the capital and optimizing by market what capability.

And how we can market the best capable speed with the cash available.

So, it really is a balance of the cash, the technology capability, and the economics.

And then taking that and optimizing that message within each market, so it is very market-specific.

We seem to win that way.

We consistently upgrade speeds.

In the talking points that we had, I think there's a 25% increase in the households that could receive 20 meg and higher, and a 25% increase in the households that could get 40 meg or higher at the end of 2013 versus the end of 2012.

And we will continue to shorten the loop, to put fiber in the network to shorten the loops to bond and do whatever is necessary in our markets to be able to compete with the cable companies.

Stewart, when you look at 2014, does the available homes for sale for Prism, is that going to be expanding at the same rate we saw in 2013?

It will not expand at the same rate.

We added about 800,000 homes past in 2014 -- 2013, rather.

For 2014, we have the Phoenix market to complete, and we have, I think Glen mentioned, the area in Colorado, Highlands Ranch.

And, we have incremental expansion in really most of the markets.

We will cover, potentially, at least an additional 300,000 maybe 400,000 homes in 2014 really, without going into any new markets.

And we will evaluate new markets through the early part of the year.

Great.

Thank you, guys.

Simon Flannery of Morgan Stanley.

Glen, you talked in your prepared remarks about strategic opportunities in the marketplace.

I wonder if you could just expand on that a little bit.

Does that mean doing more things like Tier 3?

Then, just a clarification, Stewart.

I think I'm right in saying that your Q1 and your 2014 guidance only includes the share count as of December 31.

The buybacks you have done year-to-date are not in that number, I just want to clarify that.

So, given what you've already completed in the last six weeks or so, that will help some of the earnings versus what you printed here.

Is that right?

Yes.

Simon, that's correct.

Our guidance only includes this year's purchase through the end of the year.

Okay.

Thank you.

Simon, regarding my comments about strategic opportunities, I really wasn't talking about a potential acquisition there.

I was talking more about the opportunity for to expand our services, especially in the cloud-hosting space, IT services space, where there is -- we are seeing more and more demand in that space with our Tier 3 acquisition and the other product expansion, product development we are doing.

We think there's significant opportunity there in the next couple of years to do something very meaningful.

Is there timing on when the Tier 3 integration really kicks into high gear and you can start benefiting from that acquisition?

We are thinking second quarter, kicks in much higher level, certainly by midyear is our target.

We have already begun selling it and integrating it in some ways, but full integration, we are thinking second quarter.

Great.

Thank you.

As regarding acquisitions, we are focused on our key strategic initiatives.

And we think there's good growth with these and bringing more MPLS, Ethernet, expanding our Prism opportunities, connect the home, the connected office work we're doing, along with the cloud hosting.

So we think there are significant opportunities there.

At the same time, we will consider inorganic opportunities that will help drive growth, really.

We will maintain our disciplined approach to these decisions, and we just look for the right opportunities that can really grow shareholder value.

That would be our goal.

Great.

Thank you.

Batya Levi from UBS.

Strategic wholesale revenues grew for the first time in a while, and you had mentioned before that you expect wireless backhaul to begin to grow in 2014.

Can you provide more color on the timing of that?

Can we see that early on in the year?

Also, within your guidance for the year, for revenues, which is looking for an improvement in the rate of decline, can you talk about your assumption you have for strategic in there?

Thank you.

Okay.

Bill is going to address your question on wholesale.

Batya, this is Bill Cheek.

Let me talk to you a little bit about the timing and the growth of backhaul revenues.

We are continuing to build out our fiber to the tower initiative, and will have completed this year is about 18,800 or so towers.

Next year with adding another 3,000 to 3,500.

We are expecting to see the revenue compression start to mitigate.

It won't happen early in the year.

There is a fairly major reduction in some DS1s, when a large carrier turned down the push-to-talk network, and that affected everyone in the industry.

We are having to limp through that a little bit.

We do expect it will mitigate towards the latter part of the year.

Okay.

In terms of strategic services growth within your guidance?

Batya, we are expecting our strategic revenue growth to improve in 2014.

And think it will be led by our broadband, our Prism, and our data hosting areas and the success that we continue to have with business customers in the business segment.

It's about 50% of revenues going out 4% to 5%.

Should we expect that trend to continue?

Yes.

Okay.

Thank you.

Frank Louthan of Raymond James.

Looking at some of the IP trials that the FCC's got [in paramount].

Do see any value in pursuing that yourself?

Can you comment on the Managed Office platform that you've recently launched?

When do expect to get traction with that in the [FCC] segment?

Thank you.

I will comment on the IP trials, and Karen will discuss Managed Office.

Yes, we would expect to be involved in the IP trials alongside the other major carriers, there, so that we will be in a position to move in that direction and get all the learnings that we would get from a trial.

Frank, Karen.

In terms of the managed office, we really have just begun to roll that out in late fourth quarter.

But, we are really encouraged by the traction and the funnel that we are seeing.

It is a different sale for our sales reps, but it takes -- it's very simple for the business owner, right, because it allows them to have their information technology simply on a per-seat basis.

And it's bundled a business-grade data network and a hosted VoIP service or cloud-based application for e-mails and storage.

Really all-in-one package.

We are also enabling that with our MTU, fiber to the building.

We will keep you posted.

But we are very encouraged, and the [NFL] team has given us a lot of good feedback, and we think it's going to change the dialogue they are able to have in front of the customer.

Great.

Thank you.

Kevin Smithen from Macquarie.

Just a follow-up on an earlier question.

Given your sequential improvement over the past couple of quarters in broadband and Prism TV, why wouldn't you launch new markets and try to pass as many homes as possible this year?

Given that rates have fallen -- interest rates have fallen, why not take up leverage slightly to fund both the CapEx and a buyback to try to get to revenue and EBITDA breakeven as quickly as possible and retire shares?

Kevin, we are certainly looking at new markets and evaluating new markets and the cost of going into them.

We really wanted to see a little bit more success.

We really just turned up the Omaha market in September.

So, September/October on a commercial basis, and we've done really well there.

We've done well in Las Vegas, where we have fiber-to-the-home.

We've done well in Colorado Springs.

I think we want to see a little bit more performance and just make sure it really lasts, which we certainly believe it will.

All indications are that it will.

But, rest assured that we are looking at other potential markets that we could provide Prism service.

When you look at revenue growth opportunities, look at Prism, it's certainly one, as Stewart just said, we are looking hard at.

That would involve some additional CapEx.

I don't think not a whole lot for this 2014, but it also impacts our start-up expenses, our EBITDA.

We would have to take a look at that.

But if we did, we'd come back to investors and explain this is what -- we are doing this to accelerate revenue.

We are seeing significant success in these markets, and this is why we are doing it.

That would be the dish we deal with if we decided to make a move to more aggressively invest in Prism TV in the coming months.

What would, roughly, the CapEx be per market and OpEx for start up?

Kevin, it's really hard to say.

It varies by market, and it depends on the quality of the plant that's there today and how much work needs to be done in it.

So, it's really very difficult to generalize.

Again, if we continue to have good success in the markets that we are in, we will keep evaluating other markets and come back to you guys, like Glen indicated.

What's the max leverage ratio as you'd feel comfortable with exiting 2014?

What we've said is that basically, 3 times is really our bogie.

Thank you.

Next question from Michael Rollins from Citi.

The first question is, if you look out three to five years, is there a sense of what broadband speed a home needs given the evolution of technology and over-the-top type of applications?

Then, if you have a view there, how the Company is working backwards to try to get the portfolio in better shape, in aggregate, to get to that goal.

Secondly, on the consumer side as well, are you seeing any changes to the way customers are using bandwidth, using Internet, that you can just give us a sense of whether it's volume growth or usage per household.

How it's different in a fiber-fed home or fiber to the node home versus a straight-up copper home?

Thank you.

Michael, Karen Puckett.

In terms of the broadband, everyone has an opinion.

We've made good investment in our ADSL, BDSL, really BDSL technology as well as our fiber to the prim.

Depending on, at 30 meg to 50 meg, we believe we can be successful at.

With bonding, we can get well beyond that.

But, really what we are focused on is the functionality and the capability, so Prism and the connect to home we're pretty excited about.

We continue to push the technology team in getting more efficient, and we're encouraged by some work that we have going on that we will be talking about in future quarters.

So, I think from the standpoint of how we are positioned, we feel good about where we are positioned at right now.

If you look at it, we have 65% of our households can get access to 10 meg or higher on and unbonded basis, not bonded.

Almost 40% can get access at 20 meg or higher on non-bonded basis.

To follow-up, if you have some details also on usage per home and maybe growth in broadband traffic over the last year, that would be great.

So, the growth, basically in the average monthly download was 44 gigabytes, which was an increase of 24% quarter-to-quarter.

The median monthly download, however, was 16 gigabytes, which is again, about a 25% increase quarter-to-quarter.

The top 1% of our subscribers downloaded 11% of the total -- used -- represented 11% of the total traffic, basically.

And 20% represented 70% of the total traffic.

That's helpful.

One final question, if I could.

Is there a way to think about your CapEx in terms of what is a general bucket of the network that supports all of the segments?

And then maybe the CapEx specifically for consumer versus business versus -- I know you've laid out some bogeys already on fiber to the tower.

But is there a way to think about how you have this pool of broad CapEx, but then you could identify some of the pieces for us to think through where you are placing your dollars?

Our dollars are really going -- we will spend $400 million or so on broadband expansion enhancement this year, and another $150 million on our Prism TV products.

And then your -- we have a lot of success-based capital with our business customers.

But that's all the detail I really want to give you now.

Maybe $250 million or so in fiber to the tower.

I'm sorry, that was 2013.

It's going to be slightly less for fiber to the tower in 2014.

It will be more like (inaudible) to $200 million, dependent upon the requirements there.

Thank you for all those details.

Sergey Dluzhevskiy from Gabelli & Company.

Two questions, one for Glen on M&A.

Could you update us on your M&A philosophy and potential areas of interest?

Obviously, you guys have mentioned in the past that you have the right mix of assets to return to revenue stabilization and eventually to growth.

But to the extent that you would look to augment this growth requisitions, what areas would be of primary interest to you?

Also one question for Karen on 1 gigabit service offerings.

Maybe if you could share results, some initial learnings from Omaha and Las Vegas and what are your expectations for these markets and for 1 gigabit offerings in general as you roll them out?

Regarding the acquisition approach we are taking, we don't feel like we are compelled to make an acquisition.

But to the extent we can find companies that can accelerate our growth, then we are interested.

We'd expect it to be revenue growth accretive, also free cash flow accretive within 12 months.

It has to drive long-term shareholder value.

Those are the three things we look for.

The recent acquisitions we've made, all those fit this criteria, basically.

They all, especially, are poised to help enhance our growth in the months ahead.

And we will continue to look for those -- these are all a bit small ones, but even large ones we would consider.

Those are the primary criteria we would be looking for in an acquisition target.

This is Karen.

Regarding the gig learnings from Omaha and Vegas, it's still early.

Again, we are really encouraged by the results there.

We are seeing strong pull-through overall, two to three times in terms of HSI even outside of the gig footprint, as well as an impact on business customers.

So, we have landed some new business opportunities just because of what we would call a halo effect in these two markets.

Thank you.

Jonathan Epstein from Deutsche Bank.

First, on your comments about the dividend, you've previously expressed the desire to keep the 2015 dividend payout ratio under 60% of adjusted free cash flow.

Is that still the foundation of the dividend policy?

And if so, is it a litmus test, or is there any wiggle room there, especially considering the forthcoming renewal of share repurchases?

Then a follow-up on a previous question, was the $60 million savings in the quarter originally contemplated in 2013 guidance?

And can we expect savings of this magnitude in the fourth quarter of this year, of course, baking in the tax savings that you already mentioned that you expect?

Last question first.

No, this was not in our guidance for the fourth quarter or the full year, really.

And we would not necessarily expect -- we always have a few adjustments here in the fourth quarter, more related to property taxes and the true-up of our income tax rate for the year, and things like that, minor items.

But it just turned out to be much more significant this year, because we had a number of employee benefit items that have been much smaller in the past.

So, it was not baked into guidance, and we would not expect that to re-occur in 2015 -- 2014, I'm sorry.

In terms of the dividend, we basically indicated that we thought we could keep the payout ratio around 60% in 2015 when we became a cash tax payer.

It's not really a litmus test, and there is certainly wiggle room from there.

So, it's just where we thought we would be at the time that we indicated that.

So, it's not set in stone, basically, that if we get above 60% we have to take action.

So, we are good with the dividend.

We are comfortable with the dividend where it is, and we are comfortable looking out a few years to the time when we become a full-cash tax payer that, based on our business plans today, we would not have to change the dividend.

That's great.

Thank you for taking the questions.

Thank you.

Final question from Adam Ilkowitz from Nomura.

Quick question on the data hosting segment.

Can you give a little detail on how much Tier 3 added to the growth rate?

I know we're lapping cyber a bit, but I was wondering how much of the managed hosting growth was actually organic?

Then a question on cash flow beyond 2014, I know it's a little out there.

But thinking about cash taxes going up and capital spending for some of these initiatives going down, given that you are having success with GPON and with fiber on business and consumer side, does this change how you're thinking about CapEx and the speed requirements and moving more to fiber than BDSL and bonding in the future?

And how that would impact the CapEx budget going forward?

Sure.

This is Jeff Von Deylen.

On the first question, for the quarter, the Tier 3 acquisition added about $1.6 million in revenue for the quarter.

And then we did get, full disclosure, we got about $2 million benefit for exchange rate favorability.

But the rest of the managed hosting growth would have been organic.

So, we had a good -- a very strong quarter, sequentially, in terms of growth and new business customers that we added and got installed during the quarter.

On your second question, in terms of GPON and Prism impact and how we might think about capital expenditures and leverage related to that.

Really, we believe we have enough capital built into the budgets in the out years to be able to do what we need to do to adequately serve our customers and compete with the cable companies and other competitors.

If we did get to the point to where we felt like we needed to drive more fiber than we are planning on today, and expand into many more Prism markets, we would certainly come back and talk with you about that, and have the case associated with that to sell that.

But, basically, at this point, we plan on really using multiple technologies to provide higher speeds to our customers, and think we can continue to really have success there.

Again, we will monitor Omaha and the gigabit fiber trial there, as well as where we've rolled it out in Las Vegas, and see what success we have and make decisions later.

For now, we believe that with other technologies, we can basically be competitive.

Thank you.

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

Thank you, Sayid.

Overall, we are well pleased with our strong fourth-quarter and solid full-year 2013 operating results and financial results.

We believe the investments in our key strategic initiatives continued to position us to effectively compete in the marketplace and to drive revenue growth from our strategic products and services into the future.

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

Thank you.

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.