Lumen Technologies Inc (LUMN) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to CenturyLink's third-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

At this time, I would like to hand the conference over to Mr. Tony Davis, Vice President, Investor Relations.

Sir, you may begin.

Thank you, Sayeed, and good afternoon, everyone, and welcome to our call today to discuss CenturyLink's third-quarter 2015 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 question and answer.

On slide two 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 2015 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 on our website at IR.

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 portion of today's call will be Ross Garrity, CenturyLink's Interim President of Global Markets.

Our call today will be available for telephone replay through November 12, 2015, and the webcast replay of our call will be available through November 26, 2015.

Anyone listing 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 4, 2015, and should be considered valid only as of this date regardless of the date heard or viewed.

And as we turn to slide 4, I'll now turn the call over to Glen Post.

Glen?

Thank you, Tony, and thank you for joining our call today as we discuss our third-quarter 2015 results of operations and provide guidance and outlook for the remainder of 2015.

Beginning on slide 5, as you know, CenturyLink continues our transition to becoming a leading provider of integrated IP-enabled network, hosting an IT services.

This transition brings both opportunities and challenges as we work to find ways to provide our customers the product and services they need in today's environment.

Faster broadband speeds and hosting solutions are at the top of many of our customers' list of needs.

We're deploying GPON to consumer and business customers who are expanding Prism TV availability and providing competitive enhancements to our network, hosting and cloud services to meet these demands.

In the third quarter we saw several positive signs that we're making progress in this transition.

First, the consumer segment had a solid quarter with year-over-year revenue growth of 1.2%.

As we continue to deploy GPON and Prism TV to more locations throughout our footprint, we're attracting more high-value customers and we have increased our ARPU through the continued launch of GPON, higher-value bundled sales and select pricing increases.

Second, the business sales organization realignment implemented earlier this year is now proving effective, as new sales to business customers for the third quarter increased year over year and sequentially.

The third quarter marks the second straight quarter of accelerating sales with particular strength in global and enterprise.

Additionally, in our business sector we exited third quarter with a strong business sales funnel including an increased large number of large deal opportunities.

You will recall last quarter we stated that our operating expenses got ahead of our budgets and that we were committed to addressing that during the last half of the year.

We're delivering on that commitment as we have taken steps to reduce planned operating expenses by approximately $125 million in the second half of 2015.

We achieved a portion of this expense reduction relative to plan in the third quarter, but the majority of the benefit will be realized in the fourth quarter of this year.

Also we are well on track to lower our full-year 2015 planned capital budget by about $200 million which will result in full-year capital expenditures of $2.8 billion.

We are encouraged by these areas where we're seeing positive momentum.

However, the overall revenues for third quarter were below our expectations, primarily due to softness in hosting and long distance service revenues, along with higher credits and other one-time items in the quarter.

If you normalize for the one-time items that totaled about $20 million to $25 million.

Operating and core revenues were both at the low end of our quarterly guidance range.

Although our third-quarter revenue results did not meet our expectations, I'm very confident that we have the assets, the products and the opportunities required to grow our business in the months ahead.

Now turning to slide 6, we believe several key priorities will drive the future growth and profitability of our business.

The first is to grow business revenues driven principally by increased market penetration of our network, hosting, cloud and IT solutions service offerings.

With respect to our business network service offerings we continue to see strong demand from business, wholesale and government customers for high bandwidth data services, such as ethernet, MPLS and business GPON.

And we're investing in aligning our business to take advantage of this opportunity.

This quarter we saw continued strength in our sales momentum.

Third-quarter 2015 retail network sales were up approximately 15% from second quarter 2015 and up approximately 25% from the third quarter of 2014.

Additionally, we exited the quarter with a strong business sales funnel.

The sales funnel has continued to strengthen during fourth quarter and October sales results were the highest of the year.

I want to give you a few examples of what we're doing to drive higher sales over time.

As of September 30 we had fiber to the prem, including GPON available to about 490,000 business locations.

There is good demand for this product and given our relatively low penetration, we believe we have strong upside with those investments.

We also continue to enhance other core network offerings, including mix generation, MPLS and SIP trunking services and add new capabilities to our Managed Office product suite to provide differentiated simplicity for small to medium business customers looking for fully-outsourced network, customer prem, equipment, cloud and business application solutions.

We're also seeing increased interest in our managed network service offerings.

That is, customers who look to us not only to provide their connectivity but also to manage their NDN network environment to include monitoring, security and CPE.

Additionally we have a major focus on leveraging our cloud capabilities to enhance our enterprise customers' abilities to turn up and manage both network and hosted workloads in private and dedicated environments.

Over the last few months we have refocused on our legacy cloud and Managed Hosing products as part of our hybrid IT strategy.

We recently rolled out an enhancement of our legacy cloud product that seamlessly supports SAP workloads and we have seen strong customer interest in this product.

We're seeing growing interest in Managed Hosting, legacy, cloud products, as our Managed Hosting funnel is up almost 60% since August.

This funnel growth is being driven by cross-selling across our customer base including state, government, education and a broad range of Fortune 500 and mid-sized companies.

Finally, we are also seeing good interest in our IT services and data analytics service offerings.

Our focus in this area is to provide targeted services to business customers who are underserved by the traditional larger systems integrators.

Although growing rapidly, this business is small in scale today, generating only about $50 million in revenue this year.

But these service offerings give us a good low-capital-intensive opportunity to engage at the CXO level and generate leads in the other parts of our business.

This capability to provide differentiated end-to-end solutions, including IT consulting has led to a number of recent wins for CenturyLink to provide a large portion or all of communications data and IT services for those customers.

Now continuing on to slide 7, and turning to the consumer segment, we continue to see good results in those markets where we have deployed higher broadband speeds and Prism TV services.

Specifically in our markets with fiber to the prem and including GPON, the take rates continue to be strong and are exceeding our expectations.

And because GPON is such a great driver of demand and penetration, we continued to expand our gigabit footprint, ending the quarter more than 780,000 households and 16 markets that are now fiber to the prem capable.

We're also trialing technologies that enable up to 200 megabits over legacy copper networks.

This is in the early stages but it is showing good promise.

We also expanded our Prism TV service to new and existing markets, adding a total of 360,000 addressable homes in the third quarter.

We now have nearly 3 million Prism TV addressable homes which exceeds our expansion target for the year as we pulled forward some 2016 expansion plans into this year.

In addition, we're developing an over-the-top platform and finalizing content agreements to enable a robust and competitive video offering for customers, both within and outside our Prism TV market footprint.

And finally, we are focussing on driving improved operating efficiency through a number of methods, including network simplification and rationalization that should improve our NDN provisioning time and help drive standardization.

We continue our focus on improving back-office processes and systems in an effort to enhance the customer experience and realize expense efficiencies in running the business.

We mentioned last quarter that we had reduced the provisioning time for one of our major products by approximately 40%.

And since that time we've implemented process and system changes to improve the provisioning time for another major product by 30% to 40%.

We'll continue to enhance our efforts in this area as we evolve our back-office systems to a more automated approach in the delivery of CenturyLink's products and services.

In addition, we continue to drive network virtualization through the expansion of our software-defined network, or SDN, product and network function virtualization, NFV, capabilities.

These enhancements allow customers to remotely establish and manage key network services such as virtual firewalls, CVN and virtual wide area network services.

Our goal is to enable this capability to 43 data centers and approximately 3.1 million businesses by year end.

We've also laid the foundation to migrate our internal IT operations through our cloud platform as we continue to invest in IT virtualization.

We're continuing to use a cloud-first approach to rapidly deploy the same innovative platform infrastructure and software-as-a-service solutions across our internal IT operations that we're selling to our cloud and IT hosting customers.

This effort is expected to reduce our IT costs and improve security and drive other efficiencies for us.

Lastly, we continues to make progress in simplifying the processes and streamlining our work flow.

Our network inventory consolidation effort, which we have mentioned before, continues to progress well.

Additionally, we have implemented an automated sales tool that increased our cellular efficiency with anywhere, any time access to our back-office systems.

This initiative has also improved our real-time tracking of opportunities and associated results.

Continuing on to slide 8, I'd also like to briefly comment on the strategic alternative process for our data centers and colocation business operations that we announced today.

CenturyLink's Board of Directors and management team regularly review the Company's strategy and consider a wide range of opportunities regarding our business and operations to create value for shareholders.

We believe we have the right strategy in combining our network service offerings with the delivery of managed IT and cloud-based services.

Our enterprise customers are responding well to our managed services offerings.

We expect colocation services will continue to be a service our customers will look to us for, but we do not necessarily believe we have to own the data center assets to be effective in delivery of those services.

Therefore, we have engaged financial advisors and we've initiated a process to explore the strategic options for our data center assets and operations which includes 59 data centers in the US, Asia and Europe with more than 185 megawatts of power across 2.6 million square feet of raised for capacity.

The review process will involve a full range of options, including but not limited to, a partnership, a joint venture, a sale of all or a portion of the data centers as well as potentially keeping these assets and operations as part of CenturyLink's portfolio.

This announcement continues our strategy of proactive portfolio management to drive focus on strategic businesses where we can achieve profitable growth and deliver a track record of shareholder value.

The process has just commenced and we have not set a specific timetable for a decision, but we will be updating you on this process as appropriate in the weeks and months ahead.

Now I'd like to turn the call over to Stewart for a discussion of our financial results and guidance.

Stewart?

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 fourth-quarter 2015 guidance we included in our earnings release issued earlier this afternoon.

Beginning on slide 10, I'll review some highlights from our third-quarter results.

I'll be reviewing the results excluding special items, as outlined in the earnings release and associated financial schedules.

Operating revenues were $4.55 billion on a consolidated basis, a 0.9% increase from third-quarter 2014 operating revenues.

The increase primarily due to the incremental $158 million revenue impact from the acceptance and recognition of CAF Phase II funds in the quarter.

Our core revenue defined as strategic revenue plus legacy revenue was $3.99 billion for the third quarter, a decline of 2.1% from the year-ago period.

Strategic revenues grew 0.7% year over year, primarily driven by strength in strategic products such as high-speed internet, high bandwidth data and Prism TV.

In the third quarter we added approximately 11,300 Prism TV customers.

High-speed internet customers declined about 37,000, partially the result of tightening our credit and collection processes.

As a result of these actions, high-speed internet and Prism TV net subscriber growth was negatively impacted.

However, these adjustments had little impact on revenue and should actually help improve our broadband growth in 2016 due to lower churn.

We generated operating cash flow of approximately $1.78 billion for the third quarter, and achieved an operating cash flow margin of 39.1%.

Cash expenses were nearly flat year over year, primarily due to lower customer premise equipment costs related to lower data integration revenues which were partially offset by higher employee benefit expenses, Prism TV, and other costs.

Cash expenses declined $23 million from the second quarter of 2015, as we took measures to reduce planned expenses in the second half of the year.

Free cash flow, defined as operating cash flow less cash paid for taxes, interest and capital expenditures, along with other income, was $747 million for the quarter.

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

Adjusted diluted earnings per share for the third quarter was $0.70.

As we've discussed on prior earnings calls, adjusted diluted earnings per share excludes special items and certain non-cash purchase accounted adjustments as outlined in our press release and associated supplemental financial schedules.

Additionally under the $1 billion share repurchase program, we repurchased 9.8 million shares for investment of $263 million during the quarter.

Under the current program started in the second quarter of 2014, we have repurchased 27.5 million shares through November 3, and have approximately $133 million remaining under the repurchase program.

Moving to slide 11 and our business segment, in third quarter business segment generated $2.64 billion in operating revenues which decreased $137 million, or 4.9%, from the same period a year ago.

Third-quarter strategic revenues for the segment decreased 2.1% to $1.6 billion from third quarter a year ago, driven by the declines in low bandwidth data services, wholesale repricing and one-time items, partially offset by continued strength in high bandwidth services such as MPLS, ethernet and Wavelength.

Legacy revenues for the segment declined 7.1% from third-quarter 2014 due primarily to a continuing decline in access lines and lower long distance revenues.

Total business segment expenses decreased from a year-ago period, driven primarily by lower CPE cost, partially offset by higher employee-related expenses.

The segment margin of 41.5% declined from 44.1% a year ago.

This decrease was primarily due to the continued decline in business segment legacy and low bandwidth data services revenues.

On slide 12 I'll provide a little more detail on the revenue mix within the business segment.

Our high bandwidth data services revenue grew $44 million or 6.7% year over year compared to third quarter 2014, driven by continued strength in sales to enterprise and governmental customers.

While the growth rate remains solid for high bandwidth services, it was somewhat dampened by renegotiated pricing for ethernet back haul services with a large wholesale data customer, we discussed with you last quarter.

High bandwidth data services revenue for retail network customers, excluding wholesale, grew approximately 8.6% year over year.

Our low bandwidth services, including private line, continued to decline in the third quarter.

The year-over-year decline of $68 million, or 11.8%, was primarily due to wholesale customers continued network grooming efforts and the migration to fiber-based services that we've experienced over the past year.

We anticipate this level of year-over-year decline to improve over the coming quarters as we cycle through this period of higher disconnects.

Hosting revenues declined $7 million or 2.1% from the prior year, driven primarily by higher credit reserves, including those related to service outages and an unfavorable foreign currency impact of approximately $6 million which were partially offset by higher non-recurring revenue.

In the third quarter data integration revenues decreased approximately $32 million or 17% compared to third quarter 2014, driven by lower CPE sales and maintenance revenues.

And again, these revenues are fairly low margin.

Now turning to slide 13, consumer generated $1.51 billion in total operating revenues, an increase of $18 million or 1.2% from third quarter a year ago.

Strategic revenues in this segment grew 7.2% year over year to $763 million, driven by year-over-year growth in high-speed internet and Prism TV customers and higher average revenue per customer through select price increases and higher-value bundles.

Legacy revenues for the consumer segment declined only 4.2% from third quarter 2014, as access line and long distance revenue declines were partially offset by select price increases.

Operating expenses increased $10 million or 1.6% compared to the same period a year ago, due to higher Prism TV costs.

Now turning to slide 14, for fourth quarter 2015 we expect operating revenues of $4.4 billion to $4.45 billion, core revenues of $3.97 billion to $4.02 billion and operating cash flow between $1.72 billion and $1.77 billion.

Adjusted diluted EPS is expected to range from $0.62 to $0.67.

Our anticipated sequential decrease in fourth quarter operating revenues and operating cash flow compared to third-quarter results, is primarily driven by the retroactive recognition of CAF II funds in the third quarter.

That concludes our prepared remarks for the day.

So at this time I'll ask the operator to provide instructions for the Q&A portion of the call.

(Operator Instructions)

Michael Rollins.

Hi, thanks for taking the question.

I was curious if you could talk a little bit more about the thought process of pursuing strategic alternatives for the data center business.

Firstly, if you dispose of that, would that include the cloud and hosting business?

Or would it be colocation only?

Second, could you talk to us about how much capital you put into that business to date including the M&A?

Third, could you give us an EBITDA figure for that business in terms of the portion that you're pursuing these alternatives for?

Thanks.

Mike, first of all, we're not ready to talk about the financials at this point.

Obviously we do disclose the revenue for this business is about $600 million annually, today.

The sale of these assets do not include our cloud and hosting operations, strictly the data center operation, the co-lo business itself.

That is what we're selling, or looking to sell, looking at alternatives, looking at what the best future use of these or management of these assets will be.

So that's our view right now.

We're just starting this process.

And can you refresh our memory with how much of the assets that you physically own versus those that you lease from third parties?

Mike, most of the assets are leased from third parties.

We own several of the data center properties, but probably, just guessing offhand, probably less than 10 or so.

Some of the old Qwest data center assets are primarily the ones that we own.

Most of the others are leased.

Last question.

As you thought about pursuing strategic alternatives for this part of your business, did you evaluate pursuing strategic alternatives for any other parts of your business?

Or is that something that you may consider in the future?

And thanks again for answering all those questions.

Yes, Mike, we continue to look at all of our assets and look at the opportunities for them and these are the ones we believe today are the ones we should take a look at.

We may look at others in the future, but right now this is the part of the business that we believe it's not necessarily important for us to own.

So this is why we're looking at these assets as far as strategic alternatives are concerned.

Thank you.

David Barden, Bank of America.

Hey, guys, thanks for taking the questions.

First, a follow-up on that.

If this $600 million co-lo business generates a 35% margin and it were to trade at the multiple at which Windstream recently announced their deal, that would be about $3 billion.

And then if you took about half of that and got back to the midpoint of your leverage range, you would still have $1.5 billion.

What would be your thought process in terms of priorities for allocating that money?

10% of the equity market cap, obviously -- potentially creates a lot of options, it would be interesting to discuss.

Second, if you could give us more specifically, of the $125 million cost cuts, what was in the third quarter?

And obviously then what's -- we can do the math on the fourth quarter.

And the last piece would be, Stewart, on those slides, on 11 and 12, I think that there is the big debate around a company like a CenturyLink, and in particular CenturyLink, is your revenues are coming down.

You've had a tough time figuring out what's going to happen on revenue.

We're having a tough time.

But even tougher, it has been trying to line up the margins with these different businesses to figure out what's important.

CPE comes down, it is not important but if legacy voice does, it is.

Can you put margins around these different buckets so that we could do the math and figure out, as we predict what happened in revenue decline, what is going to happen to margin decline?

Thanks.

At this point I'll answer the first question and ask Stewart to address the others.

We realize there are a lot of good options for us to use the proceeds from this, if we were to end up selling these assets or leveraging them in a way to create cash for the Company.

But we are not ready to talk about those.

They're pretty obvious, some of the options we have.

But we know that the -- we believe the opportunity is there and we continue to work with our Board over the next few months to decide how to best utilize those proceeds.

Stewart?

Yes, so, in terms of the cost cuts, basically we did a little bit better than we had expected in the third quarter.

But we expect fourth quarter costs to be down in the neighborhood of $100 million, which is the same amount we gave last quarter between third and fourth.

And part of that is seasonal, related to the seasonality of the business.

And the rest of it really relates to CPE and some of the measures that we took reduce our staff.

So, again, probably about another $100 million decline from third quarter sequentially in terms of cash operating expenses.

In terms of the revenue trends and forecasting of the margins, based on an increase in sales funnel and the improving sales trend over the last couple quarters and our improving sales to revenue or order to cash, we expect to reach revenue stability during the last half of 2016.

So we would believe the pressure we're seeing in the last half of this year in hosting and wholesale will carry forward into the first half of 2016 which would make the year-over-year revenue comps during that period some what challenging.

Again remember, we have the wholesale renegotiation of a contract too, with a large customer that will cycle through after second quarter of next year.

But unlike previous years we don't think next year will be dependent on significant revenue growth from new initiatives to hit the revenue target in the second half of next year.

In terms of margins, the margins in the consumer business have been relatively flat.

We would hope to keep the margins there relatively flat to slightly down, as we'll still see the cycling through of legacy revenue as we drop legacy revenue and replace it with more strategic revenue such as our Prism TV product.

And on the business side, basically the margins there we would expect to see some continued deterioration there due to really the same reasons associated with the loss of legacy revenue and replacing it with the strategic revenues at a lower margin.

But we've also done a good job there of controlling our expenses as well, which hopefully will mitigate some of the margin decline that we would otherwise see.

Got it.

Okay, thanks, guys.

Amir Rozwadowski, Barclays.

Thank you very much.

Following up on some of the questions around the strategic alternative that you're currently pursuing, can you provide us with a bit more color in terms of why do you believe this is the opportune time right now to monetize the colocation services business?

I would suspect given the demand environment there is healthy demand for those types of services.

Would love to hear your thought process on why this is the opportune time.

I recognize thinking about specifics around what you could do with that capital, building upon David's prior question.

It's probably a bit early-stage right now.

But as you look at your portfolio of assets today, how do you feel about the portfolio assets in terms of the growth opportunities?

Because clearly within the portfolio there are some key growth opportunities.

And how we should think about whether or not there is a potential opportunity to bolt on additional assets or anything along those lines in order to accelerate growth towards your strategic services, Thank you very much.

Amir, first of all, as you mentioned, as far as why now is an opportune time today, valuations are obviously good right now.

They can always change but we know that the market is good.

But that is just one factor.

For us to really grow the co-lo business, it requires really more CapEx than we've been willing to put into the business.

We said that up front, that we were not going to invest heavily in the data centers, that we thought they were a synergistic asset that we could grow with the rest of our business.

However, with the valuations, we think our cash flow maybe could be used for investments that can drive higher returns, basically, and drive better shareholder values.

That's why we're looking at it.

And we don't think it's, as I mentioned earlier, that it is crucial for us to own these assets in order to provide a full solution package for our customers.

So that is why we're looking at it now.

And as far as the asset portfolio, we believe we have a strong portfolio of assets we can leverage to drive future growth.

We don't feel like we are compelled to go out and acquire additional assets or companies.

However, we do believe there are some potential acquisitions and organic opportunities there that could drive growth.

Whatever we do, we'll continue to utilize our very disciplined approach to acquisitions and be sure that we believe they are investments that can really drive long term shareholder value.

So fiber assets, assets that perhaps drive top-line growth that would be synergistic to our other offerings, such as our managed cloud offerings, our other network services that we believe we can grow in the months ahead.

So those are the types of opportunities for acquiring assets we would be looking at.

Thank you very much.

And one follow-up, if I may.

In terms of your operations, you folks had a transition to a bit of your strategy with respect to your sales force in recent quarters.

I would love to get an update in terms of how that transition has occurred and in terms of the progress that you've made from that perspective.

Well, it was a pretty bumpy ride.

We said up front it was not going -- we were going to have some issues with that.

It lasted a little longer than we thought.

However, if you look at our sales results this last quarter especially, latter part of the second quarter, and going into the third quarter and especially into the fourth quarter, we're seeing the benefits of those changes really come to fruition.

So we believe it is -- we're proving that it was the right move.

There are some adjustments we'll make to really fine-tune it, but we believe these were positive changes that we're going to see benefit from in the months and years ahead.

Thank you very much for taking the questions.

Thank you.

Simon Flannery, Morgan Stanley.

Great, thanks a lot.

You touched on the revenue growth outlook.

Can you talk a little bit about the competitive environment with cable, the broadband market was a little bit soft.

What's going on there at churn, gross adds?

What can you do to return to growth there?

And also, talk a little bit about Prism.

We were talking earlier today on one of the calls about cord cutting by the millennials and the move to over-the-top, skinny bundles, et cetera.

Any thoughts on some of those offerings?

Thanks.

Ross, I'm going to ask Ross to talk about that for a minute with you guys.

Him it's nice to meet you.

In the consumer market the competitive environment has remained fairly stable but we're seeing another of speed increases coming from the cable providers.

But we continue to see success in areas where we've got greater speeds and we remain challenged in the areas where we have the higher speeds.

We still continue to see strong penetration and velocity especially in the GPON markets.

In the small to medium business over the last three quarters we've seen our investments increase distribution and business GPON and advanced capabilities such as Managed Office significantly improve their market share trends versus the cable providers.

And we expect to see improving sales and market share trends in the segment certainly going into 2016.

I think the outlook is fairly positive.

And, Simon, I might add that the change that we made in the credit policies, and really collections, drove probably about 17,000 or so of the 37,000 decline that we saw in high-speed internet customers during the quarter.

We are going to focus on really trying to penetrate the areas where we have rolled out GPON.

We're also looking at other ways to improve our speeds continually, improve our speeds over copper.

So I think that we'll be able to remain competitive and hopefully become more competitive actually than we are today.

We're also working on an over-the-top offering we'll be trialing in third quarter, that we hope to roll out on a trial basis in two or three markets latter part of this year and early next year, that we think will help us with the millennials and be a lower-cost option from the standpoint of the way we roll it out than our Prism product is today.

Great, thank you.

Batya Levi, UBS.

Great, thank you.

Can you address the slow -down in high-speed retail business revenues that we saw?

I think it grew 8.6% versus a trend of double-digit growth.

What are you doing to accelerate that growth again?

And second question on the CapEx, you pulled forward some of the spending into third quarter and you maintained the guide for the year.

How should we think about potentially different CapEx buckets for next year?

So, Batya, in the slow-down high-speed internet revenues, we actually had some pretty large federal items that flowed through in the first quarter and the second quarter, that didn't recur in the third quarter.

So I think that's part of that.

Part of what we're doing there too, and on high-speed internet as well, and ethernet really, is really pushing to reduce our provisioning periods like Glen spoke about earlier during his part.

In terms of CapEx for 2016, we're currently thinking about $3 billion which would probably include $350 million to $400 million of CapEx associated with the rollout of the CAF II.

And just to follow up for next year you had mentioned -- this is for 2016?

2016, yes, CapEx.

Okay, thank you.

Frank Louthan, Raymond James.

Great, thank you.

Can you talk a little bit about what some other things it might take to get the strategic growth back up?

And what can you show, do you have any kind of contracts or other things you can give us suggests this is changed?

And then can you walk us through how you are going to be deploying the CAF II funds, when we'll start to see the construction for that?

And when do you expect to see revenue?

And any chance of those deployments might also include video?

Thanks.

Yes, Frank, I have a few comments and let Stewart add his portion of strategic growth back up.

If you look at the second half sales growth of phone expansion, it is creating some improving trends headed into 2016.

So we think that's a sign.

If you look at our sales that I mentioned earlier, in the funnel we think that's really a positive.

We're seeing improvement in the front-line sales productivity of the business side.

We're seeing -- our higher participation rates are hitting our quotas basically.

We're seeing growth in our channel partners and [line sys] there.

We expect further growth there in the month ahead.

We're also expanding our wholesale product to include HIS and VoIP, Voice-Over IP.

So we expect to enhance our wholesale sales there and revenue.

And then, finally, just the continued expansion of GPON and Prism.

We've increased GPON market significantly this year, up to 7.8 million households passed now.

So we're seeing 780,000 households passed.

That expansion there, along with the business GPON up to about 490,000 businesses now, those give us a lot of potential going forward.

Okay.

And on the CAF II deployment?

Yes, Frank, with respect to the CAF II deployment, we would expect to really hit the ground running here in late 2015 to 2016, to get some of the construction done and to get the living units that are easiest to get to first, such that by the end of 2016 we hope to be upwards of 20% or maybe even a little more in terms of the 1.2 million living units passed.

And with the over-the-top product that we're going to roll out, it would be available to CAF II households where we have 10 down and 1 up.

And some of those households will have more bandwidth than that, too, if they're closer to the node.

So, yes, the product would be available there, so would have a video product available.

Any color on the over-the-top product?

Is it just a smaller feature set or is it a streaming package like Sling or what are you thinking about?

Why don't we ask Amir Hussain to address that for you.

You're actually looking at two types of products.

One is a skinny bundle with local linear and premiums, and it will have optional opportunity for a kit package, entertainment package and we're looking at multiple options there.

The second product that we are looking to do is in our franchise markets where we have Prism rights, taking the same content and offering it on an over-the-top content, along with aggregation of other video services which are used by our consumer customers today.

Great, thank you.

Mike McCormack, Jefferies.

Hey, guys, thanks.

A quick comment.

I know, Glen, you were talking about the consumer credit on the broadband side driving some share loss.

I would have thought that broadband is non-discretionary.

I guess you don't have a sense for where those folks are going.

Can you explain how much more runway we have on that consumer credit tightening piece?

Second part, thinking about the consumer high-speed internet revenues.

Do you have any sense or you can break down for us between the fiber to the node serve tones versus copper-based DSL?

Thanks.

Mike, first of all on the consumer credit, a lot of folks are just switching back and forth carriers and lot of that is taking place there.

We had a lot of non-pay.

We just tightened up on those folks who were not paying basically and switching back and forth.

So we think -- we know we're through the majority of that, but there could be -- we'll continue to see the impact of this going forward.

But the majority of what caused the initial hit, I think we're through most of that.

And on the breakdown between fiber to the node and the non-fiber to the node, we really don't break that out.

But I can tell you Mike, that our best penetration, really, in the markets where we have the higher speeds.

And that's why we're focussed on investing more in access in 2016 to provide higher speeds for our customers such that it will give us a better opportunity to gain them as a customer.

Okay, thanks.

James Moorman, D.A. Davidson.

Thanks.

Could you give us your thoughts on the expectations for bonus depreciation?

Has anything changed for your outlook for cash taxes for next year?

So really the outlook for cash taxes is the same as it was last quarter.

Basically our most current information is that we really believe bonus depreciation is squarely in the radar of congressional leaders.

The House Ways and Means Committee cleared legislation, making 50% bonus depreciation part of the permanent tax code.

And the Senate Finance Committee included a two-year extension of the 50% bonus retroactive to 2015 and 2016 with their extenders package.

We believe the extenders package is going to move along and we really think that the Senate staff has been really outspoken to our people in terms of getting bonus depreciation this year.

So we feel more comfortable that we'll have bonus depreciation in 2015 and 2016, than we did last quarter.

And we felt pretty good about it then.

Thanks.

David Xavier, Wells Fargo.

Thanks for taking the question.

Related to the data send strategic review, I just wanted to ask around your leverage target, which has been three times for some time, would this potentially change that target?

And the only reason I ask is that if you were to receive a large amount of cash, you have very little pre-payable debt.

I just wanted to ask around the leverage target in general.

Thanks.

So, David, that's one of the things we'll have to work through as we get further into the process.

But our target is really still about three times.

We have said that we'll allow that to drift up if EBITDA deteriorates and we see EBITDA turning around out to ultimately bring the leverage back down.

So we really wouldn't be really held by a rating, more or less, in terms of keeping our EBITDA within a ratings range.

But we'll just determine once we get closer to the execution of the opportunity of the data centers as to where we might go with the proceeds there.

Thank you.

Thank you.

I'm showing no further questions at this time.

I'd like to hand the conference back over to Mr. Glen Post for closing remarks.

Thank you, Sayeed.

Overall, I'll just say I believe we have the best portfolio of assets we ever had at the Company.

Now it's really about execution.

We're taking these assets, leveraging and positioning them to drive future revenue growth, EBITDA growth and shareholder value.

While there will be quarterly ups and downs, CenturyLink's long-term trajectory, in my view, is as positive as it's ever been.

Look forward to working with you all in the months ahead.

Thank you for joining our call today and look forward to speaking with you at the fourth-quarter call.

Thank you.

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

This concludes our program.

You may all disconnect.

Have a wonderful day.