Lumen Technologies Inc (LUMN) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the CenturyLink Fourth Quarter and Full Year 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded, Wednesday, February 13, 2019.

I would now like to turn the conference over to Valerie Finberg, CenturyLink's VP of Investor Relations.

Please go ahead, ma'am.

Thank you, Melody.

Good afternoon, everyone, and thank you for joining us for the CenturyLink fourth quarter and full year 2018 earnings call.

With us on the call today are Jeff Storey, President and Chief Executive Officer; and Neel Dev, Executive Vice President and Chief Financial Officer.

Unless otherwise noted, prior periods are provided on a pro forma basis, assuming both the sales of the Legacy CenturyLink data centers and colocation business and the acquisition of Level 3 occurred as of January 1, 2017.

To provide clear comparability with prior periods, our discussion of revenue results excludes the effect of the revenue recognition accounting change we adopted at the beginning of 2018.

Adjusted EBITDA, capital expenditures, free cash flow and net debt to adjusted EBITDA discussed on the call today exclude integration-related expense and other special items, as noted in our earnings materials.

Let me now refer you to Slide 2 of our 4Q '18 presentation, which contains our safe harbor disclaimer.

Let me remind you that this conference call may include forward-looking statements subject to risks and certain uncertainties.

In addition, on this call, we will refer to certain non-GAAP financial measures, which are reconciled to the most comparable GAAP measures, which can be found on our Investor Relations website.

With that, I'll turn the call over to Jeff.

Thanks, Valerie, and thank you to everyone for joining us.

On the call today, I'll provide a high-level overview of our significant accomplishments in 2018 and discuss our updated capital allocation approach and how we are positioned for 2019 and beyond.

I'll then turn it over to Neel for a detailed review of our 2018 results and the outlook for this year.

After that, we will open it up for your questions.

As a quick recap, 2018 was a critical year for CenturyLink.

At the beginning of the year, we shared our outlook with you, including expectations for EBITDA and free cash flow.

During the year, we significantly raised that outlook.

The actual results for EBITDA were solidly within and free cash flow slightly exceeded the updated ranges we provided.

CenturyLink closed the acquisition of Level 3 at the end of 2017, and we spent most of 2018 focused on integrating the companies.

While we still have more to do, we are ahead of where we expected to be at the end of our first full year.

During the year, we continued to implement a disciplined approach to managing the business for profitable revenue.

We've moved quickly away from noncore, less profitable products and customer contracts and instead have focused more on product development, particularly around cloud, security, hybrid networking and edge computing for our Enterprise customers.

With respect to synergies, we achieved the full run rate savings of $850 million in 1 year rather than the 80% in 3 years as initially projected.

And we believe we still have more to come.

Sales from mid to large Enterprise customers, always a challenge during an integration, have been generally improving.

But we are still not where we want to be.

We're investing to improve our customer experience for all customers but especially our consumer and small business customers.

We've also continued to invest in expanding our fiber network in the number of on-net fiber-fed buildings.

Many companies talk about the strength of their networks, and I'll come back to that in a moment, but I want to emphasize that a key part of our value proposition for customers and shareholders is the tremendous set of assets we've assembled within the company.

Before I go any further, though, I want to talk about the capital allocation decisions we announced earlier today.

This is obviously a big decision, and I want to share our thinking.

First, we continue to believe returning cash to shareholders in the form of a dividend is an important part of our equity value proposition.

However, as you saw, we announced today that we plan to reduce the annual dividend to $1 from the current $2.16 per share, beginning with the next dividend declaration.

This decision is not based upon any concern for the outlook of our business.

Our business fundamentals are strong, and we believe that our free cash flow could sustain the dividend at the prior level through 2019 and beyond.

As I said, this change in policy isn't about a diminished view of our business.

It is driven by our view that the long-term interest of shareholders are best served by proactively accelerating delevering to a new lower target range of 2.75 to 3.25x net debt to adjusted EBITDA.

Even with our focus on debt reduction and increasing the investments in revenue and EBITDA growth initiatives, we will still return more than $1 billion a year in free cash flow to shareholders.

The net effect of our new policy is that we expect to achieve our leverage target in approximately 3 years while fully funding our business and resulting in a dividend payout ratio in the 30s.

By reallocating more of our capital to leverage reduction, we believe we'll improve our cost of capital, return a significant amount of cash to shareholders at a very sustainable payout ratio and provide additional flexibility to respond to market opportunities and any potential interest rate challenges that may occur.

This is not something we did lightly, but it is something we firmly believe is in the best long-term interest of our shareholders.

With regard to the NOL rights plan we also announced earlier today, the board voted to adopt a plan to protect our valuable net operating loss carryforwards, or NOLs.

As of the end of 2018, we had an NOL balance of $7.3 billion.

Our ability to utilize our NOLs can be negatively affected if there is an ownership change as defined under the IRS rules.

I won't get into the details of the IRS rules, but there is a 3-year measurement period from the closing of the Level 3 transaction.

That transaction moved us significantly closer to a 50% change in ownership, which could cause us to lose a large portion of our NOLs.

The purpose of the NOLs rights plan is to protect the company's ability to fully utilize its NOLs in the future and prevent the reduction in shareholder value that would result from the loss of those NOLs.

The plan is limited in duration, expiring at the 3-year anniversary of the close of Level 3, approximately 21 months from now.

This plan goes into effect immediately, but we will take the plan to shareholders for ratification at this year's annual meeting in May.

I mentioned earlier the tremendous set of assets we've assembled, and I would like to go a little further into that and why we intend to ramp investments from our 2018 level.

If you turn to Slide 4 of the presentation, you can see many of the networks we have assembled to build CenturyLink.

In fact, we operate nearly every next-generation fiber network that's been built since the late '90s.

I'm not suggesting the technology we used back then to light the fiber is still in service, but the fiber itself and the conduit systems those fibers are placed in remain within our network and are incredibly valuable.

On the long haul side, we have consolidated the domestic and international fiber and conduit aspects of Genuity, WilTel, Broadwing, Qwest, Global Crossing and, of course, Level 3, serving customers in more than 60 countries worldwide and tied together with substantial subsea capacity.

This is not a hodgepodge of network assets thrown together with a little bit of network here and a little bit of network there.

To me, these assets really represent the combination of the best long-haul networks ever built.

On the metro side, our assets include, of course, Legacy CenturyLink but also the extensive metro assets of Level 3, tw telecom, Progress Telecom, ICG, Looking Glass, Embarq, Telcove.

We are rich and deep in fiber and connect thousands of buildings worldwide.

In fact, the conservative estimate we made when the transaction closed was that we had more than 100,000 fiber-fed buildings.

After a detailed audit over the last year and with significant number of new buildings added to the network in 2018, we now report more than 150,000 Enterprise buildings worldwide, including more than 2,200 public and private data centers, and the number of on-net buildings is still growing.

In addition, our metro and long-haul conduit systems give us a significant cost and time-to-market advantage over 5 networks that were directly buried in the earth and a reliability advantage over infrastructures like aerial fiber.

Adding our next long-haul fiber cable is a simple matter of pulling the cable into a spare conduit.

No new rights-of-way, no permitting, no trenching, just pull and splice.

As a result of the various networks we've acquired, we often have multiple routes and conduit systems to choose from to enhance diversity, improve latency and further reduce our cost to build.

I recently read an analysis that suggested we do not sell dark fiber.

That's simply wrong.

We actively sell dark fiber to an array of content providers, large enterprises, and are working with most major wireless operators to explore how we can work with them on their 5G initiatives to expand our network and our capabilities.

We tend to focus on the large nationwide deals that benefit from the scope and scale of our fiber network, but we routinely win regional and metro fiber deals with customers.

Fiber deployment remains a crucial priority in our capital budgeting process, and we consistently add more fiber than you probably realize.

While most cables deployed today are made up of traditional fiber types, looking at just the last 36 months, we've added 3.5 million fiber miles in new ultra-low-loss fiber that will enable new levels of performance across the network and for our dark fiber customers seeking to build their own multi-terabit systems.

Although fiber technology has evolved far more slowly than the electronics used to light the fiber, we believe our spare conduits ensure we are future-proofed against technology changes and fiber constraints.

Whether expanding our metro fiber footprint, continually adding new buildings or increasing our long-haul fiber inventory, we continue to invest in our fiber infrastructure.

Let me be clear, we believe CenturyLink has one of the premier fiber and conduit networks in the world.

But we also have the capability to utilize those assets to deliver everything from the large dark fiber deals for a content company to adaptive networking for multinational enterprises utilizing a hybrid cloud architecture, down to SD-WAN or high-speed IT for small and medium businesses.

As examples, the Cloud Connect services we deliver give customers flexibility, capacity and control of their network resources in a complicated hybrid cloud environment.

Combining MPLS, SD-WAN and high-speed IT for other customers allows us to provide the different flavors of IT capabilities that they need to meet their location-specific network challenges and recognize that a one-size-fits-all is not the right model for technology-based services.

And all of that is before you get to security, CDN or even services as seemingly mundane as next-generation call center solutions, all of which is on our fiber network and, more importantly, are enabling our customers' digital transformations.

Next on the horizon is edge computing.

Again, our fiber assets are key, and we are investing to couple those assets with our widely distributed central offices, data centers and the other points of presence we operate to distribute computing resources at the very edge of the network.

A layer on top of our core capability is our own digital transformation and the improved customer experience and lower cost that will come from it, and I'm excited about where we are and where we're going.

I don't mean to reiterate things you already know about CenturyLink, but I want our shareholders to fully appreciate the assets and capabilities behind our investments.

All of these initiatives and investments are aimed at expanding and leveraging one of the world's best networks to drive long-term free cash flow per share.

Turning to our 2018 results.

We closed out 2018 on a strong note.

I'll leave the details to Neel.

But as I mentioned earlier, we met our guidance for full year adjusted EBITDA and free cash flow, both of which we raised through the course of the year.

We saw improved revenue performance in our business markets.

Part of the strong fourth quarter performance was related to professional services in the federal space and other onetime items in our international and global accounts group.

But even with that, we still improved performance compared to third quarter 2018.

The company continued on its path to achieving synergies, reaching the full $850 million originally projected for the entire deal and have identified more opportunities still to come.

And we've initiated the fundamental transformation of CenturyLink from a telecom company to a technology company.

We expect these efforts to both improve our customer experience and increase our operating efficiencies.

Neel will give you the details on our outlook for 2019.

But again, I'm excited about the future of our business.

Over time, we see the opportunity to improve the revenue -- trajectory of our business markets revenue.

Our 2018 financial guidance -- excuse me, performance gives us confidence in our ability to grow adjusted EBITDA and generate strong free cash flow even in the face of significant legacy revenue declines.

Our plan for 2019 includes investing to improve the trajectory of the business, increasing CapEx by roughly $500 million.

As I mentioned earlier, those investments include expanding the fiber network, adding new buildings throughout our footprint, enhancing our Enterprise product portfolio, continuing our investments in CAF II and transforming our customer and employee experience.

We're also aligning our channel structure to take advantage of market opportunities and gain efficiencies.

In January, we made an organizational change to combine our indirect channels with our small and medium business unit as these groups ultimately target the same set of customers.

Given all of the new on-net buildings that came with the acquisition of Level 3, we are not yet serving the small and medium business addressable market as effectively as I want.

Additionally, we moved our local, state and education sales team into our strategic Enterprise group, which manages very similar customers today.

For the Wholesale business, we expect to see much of what we've seen over the past few years, generally declining but predictable revenue.

We're aggressively managing the Consumer business for cash contribution but also expect to see declines consistent with the past couple of years.

We do invest heavily in our consumer experience and our digital transformation, essentially how we want to interact with consumers and believe that it will have a positive effect on churn and reduce costs.

We are continuing to invest in fiber where we see good returns and expect to grow in areas where we invest.

We're also deploying capital to support CAF II obligations.

Although there are a lot of things we can do to manage the Consumer business for cash, we are always open to evaluating other ways to maximize shareholder return from these assets.

A big part of our story for 2019 is our focus on transformation.

Our operational model is based on decades-old legacy systems and processes, which deliver a lower customer experience and a higher cost to serve than we want.

We believe we can transform the experience and simultaneously greatly improve the cost structure.

But whether you're talking about investing for growth or investing to transform our company, as I've said many times before, our focus is always on generating significant free cash flow per share.

We will carry that focus into 2019 and beyond.

We have a lot of work ahead, but we believe our asset base, our focus and our financial strength give us good reasons to be excited about the future.

With that, I'll turn the call over to Neel.

Thank you, Jeff, and good afternoon, everyone.

We have a lot of ground to cover this afternoon, so I'll start with a few highlights followed by our fourth quarter results, financial outlook, reporting changes for 2019 and then wrap up with a summary of our capital allocation plan.

Turning to Slide 5. We exited 2018 with strong bottom line performance.

We continued to expand adjusted EBITDA margin, which was 39.8% in the fourth quarter, a 430 basis point improvement since the close of the Level 3 transaction.

Adjusted EBITDA grew to $2.3 billion for the quarter and $9.04 billion for the full year.

We generated strong free cash flow of $4.2 billion for the full year.

We also ended the year by achieving our targeted $850 million of annualized run rate adjusted EBITDA synergies for the transaction much sooner than expected.

Turning to Slide 6. Total revenue in the fourth quarter declined 3.3% to $5.81 billion, with declines of 2.2% in business revenue and 6.5% in consumer revenue.

For the full year 2018, total revenue declined 2.7% to $23.48 billion, with declines of 2% in business revenue and 5% in consumer revenue.

Within our business units, our medium and small business revenue decreased 4.7% in the fourth quarter.

Sequentially, we saw a decline of 2.8% compared to 1.5% last quarter.

On a sequential basis, fourth quarter performance was impacted by the full quarter effect of the renegotiated state and local government voice contract that we referenced last quarter.

Additionally, we saw lower equipment revenue, primarily driven by our financial guardrails around CPE.

Within our Enterprise group, revenue was roughly flat year-over-year.

Sequentially, we saw a 3.3% increase in revenue compared to a decline of 1.2% last quarter.

Sequential performance in the quarter benefited from good installs related to higher sales from earlier in the year.

The strong performance was also driven by several nonrecurring revenue items, primarily professional services in the federal government channel.

From an Enterprise sales perspective, in the fourth quarter of 2018, in addition to normal seasonality, sales were impacted by the government shutdown.

International and global accounts, or IGA, revenue decreased 1.7%.

The year-over-year decrease in revenue we saw this quarter continued to be driven by the unprofitable large contract with a European customer that we renegotiated in the second quarter along with FX headwinds.

Sequentially, revenue increased 4.3% compared to a decline of 1.3% last quarter, driven by good installs from sales earlier in the year, higher usage revenue from CDN and strength in nonrecurring revenue.

Wholesale and indirect revenue decreased 3%.

Sequentially, we saw a decline of 1.5% compared to a 2.1% decline last quarter.

In summary, on a sequential basis, business markets increased 0.9% compared to a decline of 1.5% in the third quarter 2018.

Overall, this sequential performance benefited from higher than usual nonrecurring revenues of about $40 million.

Excluding seasonally strong nonrecurring revenues, business markets' growth would have been about flat.

Turning to consumer.

Fourth quarter 2018 consumer revenue declined 6.5%.

The declines were driven by our actions around retail video early last year and continued voice attrition, offset by growth in broadband revenue.

Turning to adjusted EBITDA on Slide 7. For the fourth quarter 2018, adjusted EBITDA was $2.301 billion compared to $2.210 billion from the year-ago quarter.

For the full year 2018, adjusted EBITDA was $9.040 billion compared to $8.686 billion for 2017.

We continue to expand adjusted EBITDA margins during the quarter, which grew to 39.8% compared to 36.8% in the year-ago quarter.

Overall, we remain focused on growing adjusted EBITDA and expanding margins on a year-over-year basis.

For the fourth quarter 2018, capital expenditures were $915 million.

For 2018, capital expenditures were $3.175 billion.

In the fourth quarter of 2018, the company generated free cash flow of $1.192 billion.

For the full year 2018, we generated free cash flow of $4.215 billion.

Moving to our capital structure on Slide 8. During 2018, we paid down approximately $1.7 billion in debt.

We exited the quarter with our net debt to adjusted EBITDA ratio at 4x.

This compares to 4.3x at the close of the Level 3 transaction.

In addition, we made $500 million in pension contributions.

Overall, we addressed $2.2 billion in long-term obligations during 2018.

As of the end of the fourth quarter, we have achieved our targeted $850 million of annualized run rate adjusted EBITDA synergies since the Level 3 transaction closed.

Integration-related expenses and special items incurred in the fourth quarter 2018 impacted adjusted EBITDA by $112 million, and payments of integration-related expenses and special items impacted free cash flow by $111 million.

The increase in the fourth quarter expenses were primarily driven by severance.

While we do have additional acquisition-related synergies, it is increasingly hard to distinguish between deal synergies and business transformation savings.

Beyond the $850 million of realized deal-related synergies over the next 3 years, we expect to achieve an additional $800 million to $1 billion in annualized run rate adjusted EBITDA savings.

We expect to incur approximately $450 million to $650 million in costs to achieve these savings.

We plan on updating our progress each quarter, similar to the updates we provided on synergy achievement.

As Jeff mentioned earlier and as noted in our press release, we are making some changes to how we're running the business and how we will be reporting revenue in 2019.

As you can see on slides 9 and 10 of the presentation, we have provided fourth quarter 2018 results in our go-forward reporting structure.

We are refining our pro formas and will provide all 4 quarters of 2018 results in this reporting structure when we report first quarter 2019 results.

Turning to Slide 11 and our outlook for the full year 2019.

Please note, all outlook measures exclude integration and transformation expenses.

I would like to mention that the company adopted the new lease accounting standard, ASC 842, on January 1, 2019.

Our accounting for the data center space we leased back when we sold the data center and colocation business to Cyxtera in May 2017 will change with the adoption of this standard and will lower adjusted EBITDA by roughly $100 million in 2019 when compared to 2018.

As such, if you adjust the 2018 adjusted EBITDA of $9.040 billion for the new lease accounting standard from the starting point of $8.940 billion, we expect our adjusted EBITDA to grow to a range of $9 billion to $9.2 billion.

Please keep in mind that there will be some variability in sequential EBITDA results.

But overall, we are focused on delivering full year adjusted EBITDA growth.

For the full year 2019, we expect capital expenditures in the range of $3.5 billion to $3.8 billion as we ramp our investments in network expansion, on-net building additions, CAF II and digital initiatives to reduce cost.

We expect to generate free cash flow in the range of $3.1 billion to $3.4 billion for the full year 2019.

The change in free cash flow year-over-year is driven by higher EBITDA, offset by higher capital investment and several working capital benefits in 2018 that will not reoccur in 2019.

In terms of a very simplified working capital calculation for 2018, EBITDA less capital, net cash interest and cash income taxes yields approximately $500 million of benefit.

If you do the same math for our 2019 outlook, working capital is about neutral.

The 2018 working capital benefit was primarily driven by tax refunds; the Level 3 2018 bonus, which was paid in 2017; company-wide performance bonus for 2017 paid in 2018 being significantly lower than target compared to above-target payout anticipated in 2019, offset by contributions made to the pension fund in 2018.

With our accelerated plan to delever the balance sheet, we expect net cash interest expense in the range of $2.05 billion to $2.1 billion for 2019.

Despite increases in interest expense from our floating rate debt, this represents a reduction compared to our 2018 interest expense.

In terms of the dividend reduction, augmenting the context provided by Jeff, it's really about our 3-year business plan.

About a year into the Level 3 transaction, we feel good about our execution.

We are now embarking on a 3-year plan focused on continuing to deliver EBITDA growth.

This includes increasing capital investment focused on profitable revenue growth.

We are also investing in transforming the customer experience and the cost structure of the company.

In 2018, we allocated $2.2 billion towards reducing long-term obligations.

Over the next 3 years, we think it makes sense to continue to allocate about $2 billion or so annually to reduce long-term obligations.

Keep in mind, we don't anticipate any material contributions towards the pension fund in that time horizon.

So most of that would go toward paying down debt and getting to our new target leverage ratio of 2.75 to 3.25x.

As Jeff mentioned, we expect to get in the range approximately 3 years from now.

Investing in EBITDA growth, combined with our deleveraging objectives, implies that the appropriate level of capital return to shareholders is approximately $1 billion, which works out to an annual dividend of $1 per share.

This will give us a payout ratio, defined as dividend to free cash flow, in the 30s.

As I noted on the third quarter earnings call, the previous dividend would have been in the low 70s.

This reduction is not about our ability to support the dividend at that level but about investing in EBITDA growth and strengthening our balance sheet.

A stronger balance sheet in the out-years will also give us more optionality in terms of additional organic and/or inorganic investments.

We believe we have a good track record of creating value with acquisitions.

In summary, the dividend reductions should not be viewed in isolation but in the context of our overall business plan and capital allocation priorities.

We are confident that this is a better path of value creation for our long-term equity holders than staying the course with existing dividend.

With that, I'll ask Melody, the operator, to open it up for your questions.

(Operator Instructions) Our first question comes from the line of Simon Flannery with Morgan Stanley.

If we can start with the dividend, I think that you made very clear what the driving factors were.

But perhaps just address why now and what's changed because, in previous calls, you had been much firmer about being able to pay the dividend and keeping the commitment to the dividend.

So what were the factors that really made it time to do it at this point?

And then on the capital spending, you went through some of the priorities.

How should we think about this level as a longer-term trend?

Is this the new normal?

Or is this some projects that you really want to address in '19 and then we might go back to a lower level going forward?

Okay.

So thanks, Simon.

And I'll start with the first one and then address the second one between Neel and me.

I have said that I believe in our ability to drive free cash flow to attain a reasonable payout ratio.

But then I didn't like the yield, the dividend yield, that we were generating.

If you look at the free cash flow necessary to do what we announced today, you'll see I haven't changed my view on cash flow or the health of the business.

We can always execute better, but we're executing well, and I haven't changed my view on how much free cash flow we'll generate.

If you look at today's closing stock price, that's a yield of nearly 15%.

I still don't think that's appropriate.

Our board looked at our free cash flow projections and believe that cutting the dividend, investing in the growth of the company, paying down debt and still returning more than $1 billion a year to shareholders was a better path for the long-term value creation.

Now you could also say, well, why didn't you do it at the beginning when you first became the CEO.

If I had done it at the beginning when I first became CEO, you'd be asking, well, why don't you take your time to evaluate it and look at it.

We think we've been very measured.

We think we've been very -- looking at the long-term value for shareholders and are focused on how do we generate the best return for those shareholders and have implemented this new allocation policy based on those priorities that we see.

With respect to capital, I'll let Neel get into the details.

But we will continue to spend capital in the ways that we think we can to drive growth in our business, revenue growth but EBITDA growth, too.

So at the end of next year, when we look at 2020, if we see opportunities to continue at the same pace of capital investment or an accelerated pace of capital investment to drive growth in those things, then we'll continue to do that.

We think that's the best and highest use of our free cash flow.

Neel?

Yes.

So Simon, keep in mind, pro forma for both companies in 2017, we spent about $4.2 billion.

In 2018, we spent $3.2 billion.

We didn't really forgo anything in 2018 but created a lot of headroom with efficiency initiatives in terms -- and also prioritizing where we invest.

And so as we look into 2019, we feel the $3.5 billion to $3.8 billion is a good range for us not only to support customer deals but also do more of the things that Jeff highlighted in his script.

We're doing more expansions in terms of metro markets.

Internationally, for example, we're -- for our Latin America business, we kicked off a plan to build in Mexico.

So there are a lot of things we're doing to kind of continue to improve our revenue and EBITDA trajectory.

So I think that's a good range for now.

We'll have more to say about '20 when we get there, but will be very success-based about it.

Our next question comes from the line of Timothy Horan with Oppenheimer & Co.

I think it's a very smart move.

It seems like you're going to have a lot more flexibility on improving the network and the balance sheet, so good luck.

But maybe just on the network, can you maybe just talk a little bit more about what the network plans are?

And do you have any kind of targeted range that you're looking for, like $0.20 of incremental revenue per dollar of CapEx or $0.50?

But maybe just a little bit more detail on what you're going to do with your fiber network.

And is there a way to integrate the networks a little bit more?

Yes.

We're -- thanks for the question, Tim.

We're going to continue to expand our network.

As I said, I believe that CenturyLink has one of the world's premier networks.

You look at all the assets we've put together, the fiber conduit infrastructure that we have, the distributed data centers and central offices and, across the nation, route, huts and regional locations, if you look at our assets, we got one of the best.

We can continue to make that deeper, closer to customers, add more buildings, and we'll do so.

We can continue to upgrade technologies and make sure that as we go into a building that we can serve a variety of services and that if the customer calls us, it's a matter of typing in commands to provision service as opposed to doing truck rolls and other things.

And so we'll continue to expand not only the footprint of the network, not only to add new buildings, but the fundamental capabilities of the network.

If you think about edge computing, we think we can get our customers' computing resources very, very close to the edge of the network from a latency perspective by utilizing all of our facilities.

So we'll look at the products and services and figure out, continue to work on how do we integrate those services into our customers' businesses.

I mentioned that we're a technology company, not a telecom company.

Telecom companies sell circuits.

Technology companies interface our capabilities directly within the applications of our customers.

And we'll continue to invest to do those things.

The other thing, just to add to Jeff's comments, I think one of the things that Jeff highlighted is kind of our core infrastructure and the strength of our core infrastructure.

And as we look at all the newer technologies coming down the pipe, whether it's 5G, IoT, autonomous cars, et cetera, et cetera, I think we are positioned well, and some of our capital allocation policies gives us the flexibility to invest.

We're going to be very disciplined and success-based about it, but I think it positions us well.

Our next question comes from the line of Michael Rollins of Citi.

Just a couple of questions.

First, can you talk about the pace of cost-cutting for the $800 million to $1 billion program you outlined?

Is that something that could be front-end loaded or back-end loaded?

And then second, have you thought more over the last month or so just in terms of longer term, is there an opportunity to separate the assets between maybe consumer and business or in some other fashion?

So I'll take the pace question.

So I think it's -- for now, I think it's good to assume it's linear.

We have a lot more fidelity around year 1 and then we're working through plans on year 2 and year 3. But keep in mind, just like we did with the synergies, our objective is going to be to accelerate.

And we're going to want to accelerate as long as it doesn't impact customer experience.

So it's not just about getting the savings, but it's about transforming the customer experience.

And we want to do both.

And, Mike, maybe to restate your question slightly, but I think I got it right.

Really, you're asking, are we willing to divest the Consumer business when we look at it.

The answer is of course.

And in fact, if you look at our data center sale a couple of years ago, you'll see we asked the same question about various parts of our business.

So we are continually looking at the businesses we're in and saying what should we do with them, how should we operate them, how well are we executing.

If you look at the Consumer business, it's only 25% of our revenue.

And we are clearly targeting Enterprise customers for our growth as the fundamental part of our business.

And so it always makes sense to look at it.

But we look at it through the lens of how do we generate the best return for shareholders.

And in some cases, that's continue to operate those businesses.

In some cases, it might be to do something else.

And that is the lens that we'll look at it through is how do we -- and we're not married to the business.

We don't feel that we have to be in it, but how do we best return value to shareholders.

Our next question comes from the line of Philip Cusick with JPMorgan.

I'm trying to triangulate around your leverage target and cost-cutting.

And what it looks like is you're forecasting EBITDA growth over the next few years to a decent extent.

How should we think about that versus a revenue deceleration of declines or the potential to grow some of these businesses in the next couple of years?

Yes.

So in -- I'll let Neel answer most of this.

But in my comments earlier, I talked about the revenue declines coming from Wholesale.

We talked about the revenue declines that we see from Consumer.

And so all of our plans and our deleveraging plans, our dividend plans, all of those things fully contemplate those declines.

I will let Neel talk about the cost savings that go with that.

But from a revenue perspective, we fully bake those in.

Yes.

So, Phil, I think we've said it all along, we're really about EBITDA growth.

And our objective is to grow EBITDA over the long term.

We -- there is a fair amount of headwinds that we have to work through in the near term, but we think we have a plan from a transformation perspective to do that.

The other thing I'd highlight for you is if you look at our new reporting structure in the business revenue of $4.3 billion, Consumer, obviously, will have declines from voice and video, but our broadband business is doing fairly well.

If you look at the business of $4.3 billion like Jeff mentioned, Wholesale is a business we manage for cash, which is about $1 billion of the $4.3 billion.

So 75% of that business we expect to grow over time.

Now there is going to be near-term headwinds that we'll work through and things we've talked about before.

But over time, our objective is going to be to improve the trajectory of that business.

So combination of that and our cost transformation effort, our objective is to continue to grow EBITDA.

Our next question comes from the line of Ana Goshko with Bank of America.

A few questions.

So on the leverage target, the 2 1/4 -- I'm sorry, 2.75 to 3.25x, how did you come up with that as the appropriate range?

Is that guided by a ratings objective?

And is investment grade something that you are targeting?

No.

So Ana, what we did was we looked at various different scenarios, we looked at our cost of capital and what we were comfortable with.

And we felt like a narrower range because we've been saying in the past that it's 3 to 4x, and we want to get to the low end of 3x.

But we just really wanted to underline the 3x.

So if you look at the 2.75 to 3.25x, the midpoint is 3x, and we want to put a defined time line around it.

Okay.

And then secondly, Jeff, I think in the prepared remarks, you said that the new target will allow the company to respond to market opportunities and wondering what that was a reference to.

Is that in a reference to potential acquisitions?

Is that something that having a lower leverage will allow you to be more responsive potentially to substantial acquisitions?

Or on stock buybacks, are those potentially on the table before you hit your leverage target?

So over time, not anytime soon.

But over time, we may reach that leverage, then we think we will be in a better position.

We think the stock will be higher, we think we'll have more cash and we think we'll have a better leverage ratio and debt structure.

So -- but of course, we're doing this so that we can be in a better position to do acquisitions.

That's not somebody should think that we're going to go out and do an acquisition tomorrow, no.

This isn't -- this is a 3-year plan to improve the health of the company and to get us where we think we ought to be.

And so we're -- I'm not talking about anything anytime soon.

With respect to buybacks, we believe our stock is well below its intrinsic value.

And whenever you think that's the case, then you certainly should consider a stock buyback, and we did that, and we'll continue to do that.

But there's a lot of question out there whether buybacks create value for shareholders or not.

But what's not in question for us, what is a certainty for us is that paying a dividend is a direct and near-term way to return value to shareholders.

So you see us maintaining a dividend of more than $1 billion a year, investing in revenue and EBITDA.

And ultimately, free cash flow per share growth creates enormous shareholder value.

And so you see us not only maintaining the capital investments from 2018 to 2019 but actually increasing those capital investments by some $500 million.

And what's not in doubt for us is that reducing leverage creates a stronger, healthier company and reduces the overhang that we see from the high leverage.

And so I want to be very clear, right now, our focus is about investing to grow our business, reducing our debt and returning more than $1 billion to shareholders.

Okay.

And then just finally quickly, with this kind of windfall of cash now that you can go shopping and buy back some of your debt, is there any part of the structure that you'd -- will be targeting to reduce?

Is it focused on higher coupons, potentially at the Qwest Corp.

level?

Or where would you look to reduce the debt?

So obviously, we want to reduce our net cash interest expenses, so we'll look at that, but we also want to simplify the capital structure.

And so yes, we'll be opportunistic.

We'll look at simplifying the capital structure, again, reducing our cost and also manage the maturity profile.

Our next question comes from the line of Batya Levi with UBS.

Our next question comes from the line of David Barden with Bank of America.

I guess, let me push back a little bit and say that I think that pretty much everyone that bought the stock from early December when Neel was at a conference talking about a comfort level in the low 70s payout ratio range bought the stock because of the dividend.

And now that you've cut the dividend, you're going to create an incremental $1 billion of cash flow per year, over a 3-year time frame, that's $6 billion of cash flow.

But you only have $3.6 billion of debt over that time frame maturing, all of which trades above par, all of which has a yield that's several hundred basis points below where the new equity yield is going to be.

So what is the reason that -- how do you create value for your equity holders by kind of creating this incremental cash flow for which there doesn't really seem to be a lot of immediate uses that are higher and better than returning it to the shareholders either through maintaining the dividend or the -- a stock buyback program?

And the second question is, Jeff, you said that one of the things that informed this decision was that you thought the yield was too high.

Obviously, one of the reasons why the yield was so high was the stock had come down because of the stories that came out from Sunit leaving, the revenue miss, body language at the conference at the beginning of the year and, really, the rumor that the dividend was going to get cut.

So the rumor that the dividend was going to get cut informed why the yield was so high, and if you had just paid the dividend, then the stock would have gone up again.

So could you kind of walk me through those 2 things for people who own the stock for yield?

Yes.

So let me take the second one first.

First of all, I did not say that the yield being high informed the decision.

I said -- I was talking about the comments I made before, and I have said repeatedly that I thought the yield was too high.

But I did not say that, that informed the decision.

What informed the decision is the belief that we need to delever and that we want to make sure that we continue to move down to lower leverage ratio and that we want to continue to invest in the business and to make sure that we are growing EBITDA and growing revenue where we invest.

And so those things.

Plus, we wanted to continue to return capital in the near-term basis to shareholders.

So first of all, the dividend yield being high isn't something that was informing the decision.

The decision was informed by fundamental business things that we look at.

But it is a comment that I made before, and I was just reiterating that comment.

Neel, do you want to take the second -- the first part of it?

Yes.

So I think if you look at our free cash flow guidance, the old dividend would have been in the 70s.

So nothing has changed from a supportability standpoint.

But we did a holistic assessment of our business and how we want to invest and our leverage and what we think -- thought was appropriate for a dividend, so it's part of an overall business plan for the next 3 years.

And we think it's a -- you could debate it, but we think it's a better path to creating more value for long-term shareholders.

And that's our view.

Sorry, Neel, let me just -- can I just follow up on that?

But what happens to the difference between the $6 billion of cash flow that you're going to generate and the $3.6 billion of debt that matures?

And everything is trading above par, so it doesn't really make sense to pay it down early.

Where does that money go?

And how does that money, which is not being spent on CapEx and is not being spent on debt repurchase and is not being put to work for the equity holder, where does that money create value for the equity holder at the margin?

Well, that's -- our view is paying down about a couple of billion of long-term obligations per year over the next 3 years makes sense.

But you have a different view.

And we can work with you off-line, David, to sit down and walk through some of those things on where we -- but we think that there are good places to put that money to use to the benefit of the shareholders and reducing the debt.

Our next question comes from the line of Nick Del Deo with MoffettNathanson.

First, I've got a bit of a nuance question regarding the planned cost cuts.

There's some level of ongoing cost cuts that you can wring out of the business year in and year out.

So when we think about the $800 million to $1 billion in synergies and transformation benefits you laid out, should we think of those as above and beyond "normal" cost cuts or inclusive of them?

I don't know how to separate them.

So you should think of those as kind of an inclusive number over the next few years.

Okay.

Okay, that's helpful.

And then, Jeff, on the M&A front, to the extent that that's more feasible given the capital allocation changes you're making, can you just refresh us on the strategic and financial lenses or filters you use to evaluate deals?

I'll be happy to, but I want to reemphasize that I don't see any major M&A in the foreseeable future.

I mean we're focused on executing on the integration of Level 3. We believe we have the greatest assets in the world, and we want to make sure that we fully take those to the market and leverage those to win the business.

And so right now, we are focused on executing.

However, just from a generic M&A standpoint, we look at capabilities that we lack and are there product capabilities out there or talent capabilities, are there things that we need to help us go where our customers are going.

And I've mentioned this already, but a technology company has to integrate our capabilities into the systems and capabilities of our customers.

We don't want them to pick up the phone and call us to order a new circuit.

We want their system to recognize that they've got a capacity constraint and to augment the capacity by interfacing directly with our systems.

And so we will look at the things that we lack in delivering those types of capabilities.

If you look at like long-haul assets, there's nothing out there that I have any interest in or that we should have any interest in.

There's nobody out there that has anything near the quality of us.

If you look at metro assets, there are small things here and there that might make sense.

But again, while I'm trying to be full in the answer, we are not actively looking at doing any major M&A.

It will be stuff around the edges and capabilities that we really want to augment.

Our next question comes from the line of Frank Louthan with Raymond James.

Can you give us an idea of where you are on the cumulative 50% change of control?

And are you close to that?

Is that part of the reason for the rights plan?

And I've got a follow-up.

Yes, it's probably best for us to research the exact numbers and get with you separately.

But yes, we're close to it.

Other than -- otherwise, we wouldn't be doing this.

And we do think that it's a real issue, and we think those NOLs are extraordinarily valuable to us.

And we want to make sure that they -- and valuable to our shareholders.

And we want to make sure that we do what we can to protect them.

But yes, we are close.

Okay, great.

And to your commentary earlier about dark fiber, how should we think about that?

How large of a business is that in terms of percentage of revenue and so forth?

And when you say you're looking and tend to be in that businesses, what should we expect that to grow?

Is that going to be a major focus for you with some of the reinvested capital?

I'll let Neel get to growth rates but -- or not.

But the -- if you look at dark fiber, it's a relatively small piece of our business, but our revenue is very, very large.

If you look at dark fiber deals that are won, it's that we're a much bigger portion of that than you would hear from the way that we talk about dark fiber.

The dark fiber, though, is a fundamental asset for all of our products and services.

And so our fiber network is extraordinarily good, extraordinarily capable, and we intend to continue to leverage that.

We don't generally break out dark fiber all the way down to that level just because our revenues are so big and we provide so many different types of networking services, but I do want people to note, that's a fundamental part of our business.

We do tend to focus on the big deals, people that need the scope and scale of -- and scalability of our network but that we also very regularly sell dark fiber to enterprises in a particular market or in a particular geography or region.

Yes, we don't break out the specific numbers.

But what I would tell you is it grew nicely this year in 2018, and it has been growing for a couple of years.

And our final question comes from the line of Matthew Niknam with Deutsche Bank.

Just a quick one on the enterprise market.

Can you talk about the latest you're seeing competitively there?

And then have you seen any change in customer behavior from a macro perspective, exiting 4Q into early this year?

Yes.

From a competitive standpoint, I mean we're constantly looking at the competition.

We think we have great assets.

We think we have great products.

We're continually evaluating our products and expanding them, I mentioned some of the product development work we're working on.

And so we think that the competition is consistent with what it's been.

We think our products are improving, and so we ought to get a leg up on some of the competitors out there.

From the macro environment, we still believe that our execution is more important than the macro environment.

However, the macro environment does extend sales cycles at times.

It does -- government shutdown does affect us and certainly on our sales and certainly on our business.

And so we do see effects of the macro environment.

But when we step back and we look at the fundamental drivers of our business, none of those fundamental drivers changed because of macroeconomics.

Our customers need more and more capacity.

Our customers need that capacity at more and more locations.

Our customers need to solve a variety of network challenges, not just dark fiber, not just SD-WAN, but a variety of things in the middle, and then we bring that portfolio to them.

Our customers need to reduce cost.

They need to transition off legacy services.

All of the trends that drive customers to buy services from CenturyLink, we see continuing.

And so the macro environment can slow things from one quarter to another.

It can certainly make things lumpy, but it doesn't change the fundamental demand for our products and services.

And then I believe if it doesn't change the fundamental demand for the products and services, it's up to us to execute.

And so that's kind of what we see.

And thank you, Matt, for being the final question of the day.

Just as -- before we conclude the call, I'd like to wrap up with a few key points.

At the beginning of the year, we said what we would do in 2018.

We did better than we said we would.

We're all -- we're well on our way to integrating the Level 3 acquisition and have found additional synergy opportunities.

We have also identified a number of transformation initiatives to allow us to improve our customer and employee experience.

And we expect between those energies and the transformation initiatives to generate somewhere between $800 million and $1 billion in run rate savings over the next 3 years.

We're aligning our capital allocation to drive shareholder value by investing in Enterprise revenue and EBITDA growth and delevering the balance sheet.

We're excited about the opportunities ahead and the transformation of CenturyLink to come.

And as always, our guiding principle is generating free cash flow per share.

I want to thank all of you for joining today's call and for your continued support of CenturyLink.

Operator, that concludes the call.

Thank you, Jeff.

We would like to thank everyone for your participation and for using CenturyLink conferencing service today.

This does conclude the conference call.

We ask that you please disconnect your lines.

Have a great day, everyone.