Lumen Technologies Inc (LUMN) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to CenturyLink's fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Tony Davis, Vice President Investor Relations. Mr. Davis, you may begin.

Thank you, Brian. Good afternoon, everyone, and welcome to our call today to discuss CenturyLink's fourth-quarter and full-year 2016 results released earlier this afternoon. Sorry for the few-minute delay, but there was an operator error on our end. I won't call the name, but I think his initials were T.D. And now I think we're off and ready to go. The slide presentation we'll 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.

As you move to 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 and full year 2017, the pending sale of our data centers and co-location business, the pending Level 3 transaction, and other outlooks in our business. So 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.

Moving to slide 3, 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 these non-GAAP financial measures and the most comparable GAAP financial measures are available in our earnings release and on our website at ir.CenturyLink.com.

Now turning to slide 4, 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 Dean Douglas, CenturyLink's President of Enterprise Markets, and Maxine Moreau, CenturyLink's President of Consumer Markets.

Our call today will be available for telephone replay through February 16, 2017, and a webcast replay of our call will be available through March 2, 2017. 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 today, February 8, 2017, and should be considered valid only as of the state regardless of the day heard or viewed. So move to slide 5, I will now turn the call over to Glen Post.

Thank you, Tony, and thank you for joining our call today as we discuss our fourth-quarter and full-year 2016 results and operational initiatives as well as provide guidance for first quarter and full year 2017. Beginning on slide 6, as we entered 2016 we shared with you our broad view of how we think about our Business and operational focus for 2016 and beyond. Our key objective is to improve the lives of our customers by connecting them to the power of the digital world. Whether it is providing connections or services on top of that connection, using the power of the digital world to improve our customers lives and businesses is really what we are about.

I will share with you in a minute where we think we made progress toward that goal during 2016, but first I want to touch on our 2016 financial performance. Overall I am not satisfied with the 2016 results, and we are laser-focused on improving our trends going forward. Stewart will discuss the details a little later, but there are a few things I would highlight about our 2016 results.

For the year, total revenues were below our expectations due to slower growth in our strategic revenues than we anticipated coming into 2016. This underperformance was primarily due to a slowdown in the rate of growth in business high-bandwidth data services, reflecting lower-than-expected new sales MPLS Ethernet services compared with our original expectations. We also saw lower growth in consumer broadband revenue, driven by unit declines as we shifted our marketing spend more toward bundled, higher-speed solutions and tightened our credit policy.

Also, we saw slower growth in consumer video subscribers and revenues than originally anticipated, and that obviously had an impact on our results, and we achieved lower than anticipated managed hosting and IT services revenue, driven principally by our managed hosting results. Taking these together, these results drove us to miss the targets we established at the beginning of the year and to come in on the low end of our fourth-quarter guidance. There are definitely a number of bright spots in our results, but as I look back at 2016, we didn't deliver at the level we expected.

In 2016 we saw significant progress toward our goal of connecting people to the power of the digital world, and if you will move to slide 7, we operationalized that goal by focusing on a narrow list of key objectives. First, with respect to maximizing market penetration of enabled network and adjacent services, while we did not hit our broadband unit target for the full year, we did see significantly improving trends in that business as the year progressed.

We improved from a broadband subscriber loss of 66,000 in second quarter of 2016 to a loss of 40,000 in third quarter 2016 to a small 5,500 loss in fourth quarter. In fact, consumer broadband adds were slightly positive for the fourth quarter and showed a 22,000 unit improvement compared to the fourth quarter of 2015. This is a positive trend, and we are encouraged that it appears to be carrying over into early 2017.

On the business side we grew high-bandwidth revenues by approximately 6% year-over-year. This is not as robust as we think it can be, but it does represent solid demand for our core Ethernet and MPLS product offerings. At the beginning of this year we have a significantly higher level of contracted orders in our provisioning funnel, so while our overall 2016 revenue results were not what we expected, we are encouraged by the trends coming out of the year.

Moving to the second initiative, we believe the greatest potential for us to drive returns on our capital investment lies in enabling and delivering broadband services. Obviously, the biggest thing we did in 2016 on this front was the Level 3 acquisition. I will discuss that later, but we remain very excited about the long-term strategic value of that acquisition. In addition to the Level 3 deal, we also continue to invest to increase the region speeds of our network. During the year we increased addressable units received 100 megabits and 1 gigabit-plus speeds by 31% and 53% respectively. We also launched our SD-WAN offering and standardized and increased the capabilities of our ethernet offerings.

Of course, from a capital allocation point of view, the corollary of the Level 3 acquisition is the colocation business sale we announced in fourth quarter 2016, and we recognize the value of colocation and managed service to our business customers, but we believe we can more efficiently meet that need by aligning our investment focus to the network and partnering with others for the delivery of total services. I will update on the colo process later, but this sale aligns with our network-first focus that we're continuing as we move into 2017.

We exited 2016 with a more robust, faster, and more capable network then we entered the year with, and our ongoing investment and the Level 3 acquisition will increase that advantage as we move forward. In addition to creating a network advantage, we are also intent on improving our customer experience. We have a long way to go before we are where we want to be, but we did see important progress during the year.

Our customer experience focus during the year has been on increased product standardization, higher levels of automation, and improved provisioning intervals. To product standardization examples to highlight that we achieve this past year are an ongoing project to reduce the number of consumer broadband offerings, as well as the ethernet standardization I mentioned earlier that moves us from three ethernet offerings on multiple platforms to a single offering, deploying the latest ethernet technology across our service footprint. This type of standardization both improves the customer experience and enables, of course, higher margins.

An important example of increased levels of automation and customer self-service is seen in the SD-WAN deployment I mentioned earlier. This capability provides customers virtualized routing, analytics, optimization, and security functionality all in one unified software platform. Finally, during 2016 we were very intent on improving service intervals for key products. That focus paid off, as we have seen a 20% to 30% improvement in service intervals for key products such as Fiber + and local ethernet.

This focus on improving our customer experience is beginning to be seen in our results, as we saw a 15 basis points improvement in consumer broadband churn year-over-year and a 30 basis point improvement in Prism TV churn. We are also beginning to see improvements in our enterprise churn trends, with an approximate 30 basis points improvement in 2016 versus 2015. And as we have a ways to go to achieve our fully-realized customer service vision, but we are intent on improvement and saw significant progress toward that goal in 2016.

Finally, our fourth operational initiative is to optimize operating and capital efficiencies. We know that our long-term success will require ongoing realignment of our legacy cost structure. The simplification and automation I mentioned earlier are expected to be an important driver of efficiency over time. But it's not just changes to systems and products. We know we have to take on the hard work of streamlining processes and reducing cost on a wide front. During 2016 we implemented several cost-containment initiatives, including the reduction of employee-related expenses by 7% to 8%.

Also in the capital side, you will notice that we reduced our expected 2017 capital spend to $2.6 billion. I want to say a word about that. First, I want to point out that we don't believe this reduction will materially affect our revenue trajectory in 2017 or 2018. We have a significant amount of embedded capacity in our existing network. Our broadband investment for 2017 are expected to actually be a little higher than 2016 levels.

On the other hand, with the colocation sale and pivot to partnered, multi-cloud solutions, we expect to spend less in those businesses than we have averaged over the last several years. Finally, with the Level 3 acquisition expected to close in 2017, we thought it is prudent to dial back our capital expenditures to give us a better opportunity to ensure that we fully understand the synergy opportunities and that we're spending our capital in the most efficient way possible.

Moving on to slide 8, if you look forward to 2017, there are a number of trends I would like to call out that I believe will be important positive drivers for our business. First, our consumer broadband unit trend is improving from a negative 50,000 in the second quarter to slightly positive growth in fourth quarter. And most of these units are at more competitive, stickier, higher ARPU and higher speeds of 40 megabits and higher. We have significant opportunity to further penetrate markets where we have higher speeds, (inaudible) capacity, and consumer broadband capabilities. We're also continuing to invest to improve the reach and speeds in our consumer broadband network including investments in CAF-II markets, where we expect significant pent-up demand for higher speed broadband services in these more rural areas.

On the video side, we are trialing an over-the-top product, but more generally we're monitoring the rapidly evolving video market closely. We don't look to video as a significant revenue or EBITDA contributor in 2017, but certainly it has a potential in the months and years ahead. We're also seeing positive spots in business network services. As I noted earlier, our bandwidth data services grew at about 6% in 2016. That is solid performance that we believe we can improve.

We are continuing to see improvements in our business network sales trends. As we enter 2017, we have a contracted provisioning funnel that is about 40% higher than when we entered 2016. These are services that are under contract, and they are in queue for provisioning, so it gives us more confidence going into 2017 in our ability to meet our revenue objectives.

These improving sales trends and increased provisioning queues are bolstered by the improvement in service intervals I noted earlier. We expect these factors to drive a faster book-to-bill ratio and accelerated revenues throughout the year. We are also continuing to improve our enterprise broadband offerings, as we are investing in both the reach and capacity of our network and continuing to penetrate enhanced ethernet and software-defined wide area network products I discussed earlier. These next-generation network products have been well received, and we expect them to grow in the months ahead.

In IT and managed services we have launched new and expanded IT solutions and integrate high-growth customer applications and workloads with our network hosting and private cloud infrastructures. These new offers such as managed security services, Managed SAP, and HANA enterprise cloud, and managed big data, and big data service have all been very well received by industry analysts and are beginning to show good traction with our customers.

Finally, we have realigned our customer-facing organizations into three distinct groups: consumer, enterprise, and IT and managed services. We expect this realignment to drive greater focus on the customer experience and accelerate growth by enabling higher levels of operational focus, faster decision-making, and market responsiveness, as well as accountability. We are optimistic about our future. Our path to growth won't be necessarily be linear, but we are confident that we have the assets, the people, and the right strategic focus to become one of the world's leading network service providers.

Finally, before Stewart reviews the quarterly results in more detail, I want to provide an update on the two transactions we have currently underway. And moving to slide 9, first, as we announced on November 4 of last year, we have agreed to sell our data centers and colocation business to a consortium led by BC Partners and Medina Capital. We received HSR approval and are in the process of obtaining final approval from CFIUS, and we expect to close the transaction by the end of the first quarter of this year.

In regards to the acquisition of Level 3, we are making progress in the approval and integration process. We have completed all state and federal filings, and we expect to complete the necessary international filings within the next few weeks. Additionally, we have formed an integration management office to coordinate and drive integration planning process and lead integration implementation once closing occurs. We believe this combination will create significant benefits and growth opportunities for all our stakeholders, including our customers, our employees, and our shareholders.

First, this transaction will enable us to build scale and deliver agile network-based products and services to customers. We really will be creating a new chapter with this combined company. We also believe this combination with Level 3 will significantly improve CenturyLink's growth profile, better position the combined company to improve its revenue trend and grow. We expect it to drive meaningful operating cash flow growth in the first full year of post-closing, including synergies as realized and including integration cost. We expect to drive more than 10% growth in free cash flow per share in the first full year post-closing, including synergies as realized and again including integration cost. And we expect to drive significant improvement in free cash flow per share in subsequent years.

The transaction also enables us to accelerate a recognition of Level 3 net operating losses, which will reduce the combined company's net cash tax expense, positioning us to create enhanced free cash flow and significantly lowering CenturyLink's dividend payout ratio. We expect to be able to utilize the combined company's strong product portfolios to bring the market even more compelling solutions to the combined company's customer base. We continue to expect to receive all the necessary approvals in a timely manner and close the acquisition, we believe, by the end of September 2017. With that, I will turn the call over to Stewart for discussion of our financial results and guidance.

Thank you, Glen. Over the next few minutes I will review the fourth-quarter results and provide an overview of first-quarter and full-year 2017 guidance we included in our earnings release issued today. Please note that I will be reviewing some of the results excluding special items as outlined in our earnings release and associated financials schedules.

Turning to slide 11, today CenturyLink reported fourth-quarter results with total and core revenues, operating cash flow, and adjusted diluted EPS all within our previously provided guidance ranges. Fourth-quarter operating revenue on a consolidated basis was $4.3 billion, a 4.2% decrease from fourth quarter 2015 operating revenues. Growth in business high-band data services and consumer Prism TV revenues was more than offset by lower legacy revenues.

Core revenue, which is defined as strategic revenue plus legacy revenue, was $3.86 billion for the fourth quarter, a decline of 4.1% from the year-ago period. Operating income, which includes approximately $200 million of costs related to severance and transaction costs, was $392 million for the fourth quarter of 2016. We generated operating cash flow of approximately $1.59 billion for the fourth quarter and achieved an operating cash flow margin of 37%. Cash expenses for the fourth quarter increased $44 million year-over-year, primarily due to higher Prism TV content costs and group medical insurance costs.

Free cash flow, defined of operating cash flow, less cash paid for taxes, interest, and capital expenditures, along with the cash impact of pension and OPEB cost, stock-based compensation and other income was $190 million for the quarter. Diluted earnings per share for the fourth quarter was $0.08, a decrease from $0.62 in the year-ago period. Again, the diluted EPS results this quarter includes the after-tax impact of over $200 million of severance-related and transaction costs.

Now moving to slide 12 and our business segment. In fourth quarter, the business segment generated $2.55 billion in operating revenues, which decreased 4.1% from the same period a year ago. Fourth-quarter strategic revenues for the segment was $1.23 billion, an increase of 1.1% compared to fourth quarter 2015, driven primarily by the continued growth in high-bandwidth data services and [vort] revenues partially offset by the decline in hosting revenues.

Legacy revenues for the segment declined 8.7% from fourth quarter 2015, due primarily to a continuing decline in voice and low-bandwidth data services revenues. Our data integration revenues decreased $10 million from fourth quarter a year ago, due primarily to lower CPE sales. Total business segment expenses were flat year-over-year.

Now turning to slide 13 and the consumer segment, which generated $1.45 billion in total operating revenues, a decline of 4.3% from fourth quarter 2015. Strategic revenues in the segment grew 1.4% year-over-year to $784 million, driven by year-over-year growth in Prism TV revenues. Legacy revenues for the consumer segment declined 10.4% from fourth quarter a year ago, primarily due to access line declines and lower price increases in 2016. Operating expenses increased $15 million or 2.4% compared to the same period a year ago, primarily due to higher Prism TV content costs.

Now turning to slide 14 and our guidance. Our guidance for 2017 assumes that we own the colocation business for the full year. To adjust for the sale of the colocation business, you can remove revenue of $50 million per month and expense of $25 million to $30 million per month from the closing date through the remainder of 2017. The anticipated free cash flow on the sale is estimated to be a reduction of $5 million to $10 million per month.

Our guidance also assumes cash income taxes to be between $500 million and $600 million in 2017 and that we make a $100 million discretionary contribution to our pension plan. For first quarter 2017 we expect operating revenues of $4.23 billion to $4.9 billion,(sic-see press release "$4.23 billion to $4.29 billion") core revenues of $3.8 billion to $3.86 billion, and operating cash flow between $1.49 billion and $1.55 billion. Adjusted diluted EPS is expected to range from $0.51 to $0.57.

In first quarter we expect continued growth in strategic revenues to be offset by anticipated declines in legacy revenues, resulting in lower first-quarter 2017 core and operating revenues compared to fourth-quarter 2016. First-quarter 2017 operating cash flow is expected to be lower compared to fourth-quarter 2016, primarily due to the anticipated decline in revenues and higher operating expenses primarily related to employee benefit and marketing costs along with the impact of approximately $40 million of favorable expense adjustments in the fourth quarter 2016.

For full year 2017 we expect operating revenues of $17.05 billion to $17.3 billion, core revenues of $15.25 billion to $15.5 billion, and operating cash flow between $6.15 billion to $6.35 billion. Adjusted diluted EPS is expected to range from $2.10 to $2.30 per share. We expect free cash flow of $1.55 billion to $1.75 billion, including capital expenditures of approximately $2.6 billion.

We anticipate lower operating revenues and core revenues in full year 2017 compared to 2016, due to expected legacy revenue declines more than offsetting anticipated increases in strategic revenue growth. Full-year 2017 operating cash flow is expected to decline from 2016, primarily driven by the continued decline in legacy voice and low-bandwidth data services revenues. The Company also anticipates a decline of approximately $150 million in depreciation and amortization expense for full year 2017 compared to 2016.

In addition, 2017 includes an approximate $70 million increase in pension expense, which of course is a non-cash item. This non-cash item accounts for over two-thirds of the difference between the midpoint of our 2017 operating cash flow guidance and average analyst consensus estimates for 2017 operating cash flow. Free cash flow for full year 2017 is expected to decline from 2016 due to the lower level of operating cash flow and an increase in cash income taxes for the year, partially offset by lower capital expenditures.

We expect our dividend payout ratio to be in the low 70% range for 2017. While we continue to face pressure related to strategic revenue growth and our legacy revenue declines, as Glen mentioned earlier, we are confident in our business and our ability to improve the revenue and operating cash flow trajectory over time. Now I will ask the operator to begin the Q&A portion of the call.

Thank you, sir.

(Operator Instructions)

David Barden, Bank of America

Hello, guys. Thanks for taking the questions. A couple, if I could. The first one would be on the guidance. Stewart, if I multiply the midpoint of your revenue and your EBITDA guidance by four, you get below the low end of the full year guidance for revenue and operating cash flow, which would imply that you're guiding to revenues U-turning and EBITDA U-turning in the following quarters, which would be a pretty big milestone for CenturyLink looking at the historical trending data. So if you could elaborate a little bit on that, that would be super helpful.

And then, the second question would be on the CapEx. I think you said there was some element of the pending Level 3 merger that was in the lower CapEx number. Obviously there's some CapEx synergies that baked into the hypothetical merger model. I'm wondering are we pulling those forward into the current guidance, or is the money you're not spending now in addition to the money that you might incrementally not spend with the Level 3 deal? And then my last one, if I could just real quick, is when you are thinking that the Level 3 vote will get scheduled? Thanks.

David, on the guidance, you're correct. We believe that basically we will be able to improve throughout the year in terms of the revenue from the standpoint -- especially in the latter half of the year. The consumer business basically we are working very diligently on penetrating the customers that we've built to from the standpoint of increasing the seeds available to them.

We are working on reducing our churn rate. So we have mitigation programs in place that, basically on the trends we've seen the last couple of quarters, we think we're going to be able to show an improvement from a customer standpoint. Dean, you want to talk about enterprise for just a minute?

Sure. On the enterprise side, we believe that we will continue to see a nice ramp-up of our revenues associated with the enterprise business for three reasons. First reason is that when we look at our backlog -- our booked backlog -- we see a 40% improvement in our booked business going forward from the first part of 2016 through the first part of 2017.

The second piece is that we are replacing our ethernet products. We had four ethernet products in the marketplace that are now being replaced by a single ethernet product. It is available in all 35 of our markets. It is MEF 2.0 compliant, so it's a current product consistent with what we are seeing in the marketplace with our competitors. And the third piece is that we continue to enjoy some nice performance improvements in our MPLS business combined with our SD-WAN business, which is going through a number of POCs with our customers, and we believe that those POCs will become real revenue-generating business opportunities in the second half of 2017.

And in IT services and managed services, we are seeing -- first of all, we have a sales force in place now that we really didn't have last year. Basically we were using our selling team that was part of Dean's organization to sell those services. And we basically came to the conclusion that we needed to revamp and stand up the sales team again, which we have done during the latter part of 2016, and we are starting to show some progress there. So we think we can turn around the reduction in IT services and managed services that we have seen over time as a result of that. Glen, you want to address CapEx?

I will. David, regarding CapEx, we are not pulling forward synergies from the Level 3 transaction. This is really pausing our work year to be sure we are investing in the right areas. As we said earlier, we have built a lot of capacity and a lot of capability in the network. We have a lot of range or capacity to sell into now, and we think it's the right thing to be sure we are spending in the right areas, to be sure we are not spending in areas that overlap with the Level 3 assets.

So we think it is wise to pause for a minute. The impact for us is if you look at what impact could be, we think it's most -- we talked about our top 25 markets and (inaudible) over 90% of our households being in business having 40 megabits capabilities -- that could go down to 86%, 87%. If you look at the 100 megabits, we anticipate over 70% -- that could probably 67%, 68%. So we're not talking about big impacts, and that we would make it up in 2020 if we didn't hit those targets. So it is only a slight miss based on the reduced CapEx.

And just quick on the potential timing for the Level 3 vote?

We expect the [procs] to be out within the week, meeting in mid-March.

Great. Thanks, guys. Good luck.

Amir Rozwadowski, Barclays

Thanks very much. Just tell me on some of the prior questions, it does seem as though that you folks experienced a material improvement in terms of your broadband subs. How should we think about the progress there and outlook? It does seem as though your expenses were a bit higher in the consumer arena, so just want to understand how to think about the positioning of that business going forward, particularly as its contribution to the overall joint entity will be wider post the Level 3 deal.

First of all, we're seeing partially the results of the build-out of greater capacity and greater speed in the network, and that is starting to pay off. As we pointed out earlier, we're seeing most of those customers in the 40 megabits range where we are seeing the real high take rates of our service. That is one of the issues. We also have a major focus on churn. We've seen improvement in churn. Just working to be sure we can improve the customer experience and make sure that we're more competitive in the marketplace in certain areas.

So long-term we think we can drive cash flow in this business, and we will see continued improvement in the units. I would say that we will look more deeply into how we approach consumer going forward. It will be a low percentage of our business after we complete the acquisition of Level 3, but it's still a really strong business where we have -- I believe with the network advantage that we have, we continue to have good success in competing in the consumer marketplace.

Expenses were a bit higher in the consumer business, and this is principally driven by the increase in the subscribers that we have to our Prism TV service, so it's content cost associated with that. I can tell you that basically we will work to try to mitigate expenses in the consumer area from the standpoint of the approach to market from a broadband perspective.

I think we're going to be more efficient with respect to marketing to our broadband customers. We're simplifying our offerings, which will make it, we believe, make them easier to sell, make them stickier with our customers, and also allow us to market them at a lower cost from an expense standpoint -- lower marketing cost than we are incurring today.

Great. And just one follow up, if I may. If we look at your earnings outlook for next year, should we assume that you folks have fully baked in that 7% to 8% employee cost reductions that you had highlighted?

Yes. It's fully baked into the guidance that we have given.

Great. Thanks very much for the incremental color.

Phillip Cusick, JPMorgan

Hello, guys. Thanks. It's been a few months now since you announced the Level 3 deal. Can you give us an update on synergy expectations, as well can you help us understand the level of cash taxes you expect to pay with Level 3 under the current tax regime? Certainly not zero, but can you give us a range: do you expect it to be a quarter, half, or more of the GAAP level?

And then finally, how are we thinking about leadership of the combined company operations? Are Dean and Maxine going to be in charge of their respective combined businesses, or is this just for this year before the deal closes? Thank you.

Phil, regarding the synergy expectations, we have not changed those expectations. However, I think we are comfortable than we were even before as we've gotten deeper into the potential of bringing these companies together that we can and will achieve those synergy-related -- $150 million of operating synergies, probably $125 million of CapEx synergies. We believe those are very achievable. At this point we're confident in those.

And in terms of the utilization of the NOL and the impact on cash taxes, if nothing changes from an income tax standpoint, regulation standpoint, we would expect to use the NOL that Level 3 brings over about the first five years or so after we close. So about a $2 billion utilization NOL, so you could just take the statutory tax rate times that. So it will save us about $700 million a year in cash taxes.

Then on the management structure, we have not announced anything there yet. We expect to do that probably by early March. As far as the Tier 1, those executives are reporting directly to me. So we're working through that as we speak. That will hopefully, again, hope to announce that by early March.

All right, thank you.

Simon Flannery, Morgan Stanley

Great. Thank you. So, Dean, you mentioned the backlog number being up 40%. Perhaps you could just elaborate a little bit more on that. You talked about some of the product developments. Is there anything going on in the broader economy or in the broader competitive environment? We've seen some better confidence numbers -- any color you can provide us about what's going on in the marketplace would be great. And then I think, Glen, you talk about reviewing over-the-top and trialing some of that and thinking about how the impacts Prism. Perhaps you could just expand a little bit more about what we should expect from Prism and over-the-top in 2017. Thanks.

So if we look at the marketplace and some of the trends in the marketplace, as I mentioned, we've got a new ethernet product that we brought to the marketplace, and it's available in all 35 markets. It's a single product that combines four prior products. So we simplified our portfolio. It makes it easier to provision, and we believe that the speed of provisioning and therefore the speed of revenue is going to be greater going forward in the ethernet product.

In MPLS, we are enjoying some success in MPLS. The fourth quarter we believe that we actually grew market share on an MPLS standpoint. Market grew about 4.3%. We grew roughly 4.9%. So the difference in our growth versus where we are in the marketplace -- and that obviously provides us with some confidence going forward.

The SD-WAN product has started to enjoy some market acceptance in terms of POCs and trials that are going on in the marketplace. And we will see that really grow in terms of interest in the product, as well as in actual conversions to a SDN platform. We've moved many of our facilities to be able to be virtualized and take advantage of the SD-WAN product, about 60% of the network to date. And we continue to drive towards that so that the entire network is capable of working through that SD-WAN platform. So in terms of products, technology that we're seeing and our own ability to manage our business, our backlog, our provisioning, and the like better in the latter part of 2016 I think bodes very well for where we're going in 2017.

So customer behavior is pretty stable? Industry growth the stable?

Yes. We've got the challenges that most of our competitors have in terms of pricing and the like, but we are seeing a churn level that's actually reduced year-on-year. And so we think that not only is the customer acceptance [solid], but we're seeing that manifest itself in new product acquisition as well as in our churn numbers.

Thank you.

Simon, I'll start on the OTT, and Maxine may want to add to this. But if you look at our Prism product, as you know, we've talked about content costs have really gone out of sight the last couple of years. If you look at the margins, sometimes that can negative margins, but we certainly make a truck roll and the cost of provisioning really makes it difficult from a returns standpoint for really driving the kind of returns we expect. With the over-the-top product, we don't have to make a truck roll. We have much wider availability due to the lower bandwidth requirements for over-the-top.

We have network-based storage for DVR, we will have local channels distinguish that product, and our trial is getting really strong reviews right now. But we have really deemphasized the Prism product because of the margin issue. Now, the value there are is the pull through. We get strong pull through of 90% pull through of additional services, and 50% of those customers are new customers to CenturyLink, so that's the real value here of the Prism product. But we have deemphasized that in moving more towards the over-the-top product and also focusing more on the broadband offerings we have versus the video. Maxine, anything? That's all we need to say.

So are we going to see rollout by the middle of the year? What's the expectation?

We will start rolling out by midyear, around midyear the over-the-top.

We are in trial right now in four markets. We plan to launch those markets in early second quarter, expand that midyear, and then further expand it throughout the year.

Thank you.

Matthew Niknam, Deutsche Bank

Thank you for taking the questions. Just two if I could. One on business high-bandwidth revenues. If we just think about the trends up until now. I know there's an expectation that revenue growth re-accelerates, but maybe if you can talk to the slowing growth to date. Is that more company-specific, or is there a competitive element you are seeing more as well? And then secondly, maybe a question for Glen on the regulatory front, how do potential changes in the regulatory environment like corporate tax reform or less regulation at the FCC level change how you think about CapEx priorities? Thanks.

So first of all, with regard to business high-bandwidth growth, couple of things that you need to be mindful of. As I said, we introduced a new ethernet product, and so obviously we have a product in the marketplace that was clearly needed to be replaced, so we invested to do that. But I think that the other piece that we really need to focus in on is in the middle part of the year we changed the focus of our business so that we were focused on our customers and specific routes to market.

And so that management team was put in place in the middle part of the year, and we started to see the benefits of that new organizational structure towards the latter part of the fourth quarter as we looked at our business going forward. And so that's why 2017 is different than 2016. The way we're going to market as well as the products we're taking to market are different. And then the intervals that I mentioned earlier, because of the way in which we provision our products now and the simplified product portfolio, shorten the amount of time from sale to revenue.

Matthew, regarding the (inaudible) given all the knowledge we have on tax reform, I believe that we are going to see the President -- the administration and Congress initiate -- I think tax laws are going to be good for businesses in general. I think we're going to see it drive economic development, incentive for investment.

I don't think it impacts our priorities really. Our priority is really to invest in our network to drive additional speed, opportunities to bring new products and services to our customers, expand our offering to additional -- the scope of our offering to additional areas of the country, really improve our fiber connectivity and the related services. So those will continue.

I just want to point out one investment we made this year that we will start to begin seeing real benefit of going forward, as far as I know with investment, we have virtualized about 60% of our major IP [POPs] as of the end of 2016. We plan to have 100% of those virtualized by the end of 2019. We also have almost 50% of our network capabilities are currently controlled through our SDN network. So virtualization of those capabilities.

We have virtualized WAN service availability, virtualized interconnect between VPN customers. Just a number of virtualization steps we've taken. Again, 50% of those capabilities are virtualized to date. Once we complete those, we expect to save over $200 million a year in CapEx. About 2019 we expect those to complete and we expect significant savings there. And also, we expect major OpEx cost savings as a result of this virtualization of the SDN and [FV] network build.

So those are the type investments we will continue to make, making our network more efficient. Also just the (inaudible) revenue opportunity of the virtualization. We think it can be a significant impact on revenue opportunity for a couple of reasons. First of all, because it's more customer-friendly, customers can control their own destiny to a certain degree. How they distribute their bandwidth, for instance. And it enables us to cover a lot more businesses when you virtualize and you go outside your current territories to many more businesses than we otherwise could reach. Today what we have done thus far with the 60% virtualization, we're reaching 4.8 million businesses. A large amount of those were businesses we could not previously sell too. So that's the type of advancements we are seeing we think can really help reduce our costs as well as provide revenue opportunities.

And sorry, if I could just go back to Dean's comment. I just want to be clear. So the deceleration to date -- it seems like a lot of these were company-specific product-set execution, but was there any change in the broader market spending environment or just competitive landscape in recent quarters to be aware of?

We have tried to address the competitive posture by the routes to market that I talked about just a moment ago. The routes to market really do allow us to have a more segmented approach to the way in which we are going to market and reaching our customers. We believe that that provides us a differentiated go-to-market approach, and obviously we're seeing that manifest itself in some areas, for example, as I mentioned, we grew market share in the fourth quarter in the MPLS market space.

Got it. Thank you.

Frank Louthan, Raymond James

Great. Thank you. Can you talk to us a little bit more specifically about the expectations for the CAF spend in 2017? And then can you give us a little color on your overlap with the Level 3 network and what your expectations might be for any sort of potential divestitures or other resale obligations you might need to incur as a remedy for the deal, or is that something you are expecting?

Frank, on the CAF-II -- try to make the answer more specific, but the reduction in our CapEx will not affect the CAF-II spend. We are not going to reduce that spend with the reduction in our planned CapEx for 2017.

Frank, at the end of the year we had a little less than 30% of the build-out done in terms of the homes that we obligated ourselves to pass with 10 meg down, 1 meg up. By the end of 2017, we expect to be about in the 40% range. So it's on schedule with what we had anticipated. And frankly that should help us with our broadband adds in 2017 as well.

And Frank, we do think there could be some required divestitures of certain properties in certain markets where we have just Level 3 and CenturyLink are the only ways into the buildings. So some of that. But we don't know if we will see that are not. That could be some divestitures. We have not heard any feedback on that yet.

Okay, great. Thank you.

Frank, what we were able to do with the other deals that we've done in the past, with the Qwest transaction for instance, we were able to agree where we had the only entrances to a building to basically provide [C Lex] and others an entrance for a flat fee basically for a period of time. So we weren't required to divest there.

Batya Levi, UBS

Great. Thank you. Follow up on the over-the-top question. As you develop plans and trial this product, do you think that you will just keep it developed internally, or would you consider a third-party solution like AT&T's Direct TV Now? Maybe can you provide some color on how much CapEx you spend on Prism TV in 2016 that seems to be coming off the budget? And a final question on the fiber assets that you have. A lot of discussions right now as the carriers plan for 5G, they need more fiber. How do you think the Company would Level 3's position, and what are some plans to capture that demand?

First of all, on the over-the-top directive, we are looking at every option. If we can get a better deal or we can get some of our content cost down and get the same type of service with the DirecTV Now, we will certainly take a look at that. We are talking to all the service providers looking at every possibility there.

The CapEx for Prism, Batya, in 2016 that would be coming off, basically we have two head-ins, and they are built in place and there is no really minimal CapEx to maintain those. Most of the CapEx that we are incurring now related to Prism is success-based from the standpoint of set-top boxes that we have to purchase when we add a customer, but really the investment is more for broadband than it is from a Prism TV standpoint. So the amount that would be coming out would be minimal.

Regarding the 5G need for bandwidth there, we're talking with the potential carriers or providers of the 5G capability, and certainly there are opportunities there. We have not quantified it yet. Really don't know what that would be, but we are certainly working with those carriers to consider the opportunities there, especially where we have fiber access transport capability.

Okay. Thank you.

Thank you. This concludes our question and answer session for today. I would now like to turn the conference back over to Mr. Glen Post for any closing remarks. Sir?

Thank you, Brian. I am pleased with the progress we have made in 2016, but there's certainly more to be done. We have dedicated and passionate and capable employees around the world, and we approach our responsibilities each day with a customer-centric mindset and with a sense of urgency. They are a great asset, a great advantage for us. We have a strong set of assets and the financial strength to continue to invest in our future. And we have the strategic clarity on how we will grow our business by connecting our customers to the digital world.

So we are excited, inspired by the opportunities we see for our customers, for our employees, and our shareholders. We can plan to continue to leverage and position our assets to drive future revenue growth, EBITDA growth, and shareholder value. And although our growth -- as we've seen before, our growth may not be perfectly linear in the months ahead, I am confident we are on a path to long-term growth and value creation. So thank you for joining our call today, and we look forward to speaking with you in the weeks ahead.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may all disconnect. Everybody have a wonderful day.