Lumen Technologies Inc (LUMN) 2019 Q1 法說會逐字稿

Greetings, and welcome to the CenturyLink First Quarter 2019 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded Wednesday, May 8, 2019.

I would now like to turn the conference over to Valerie Finberg, Vice President of Investor Relations.

Please go ahead.

Thank you, Melody.

Good afternoon, everyone, and thank you for joining us for the CenturyLink first quarter 2019 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.

Before we get started, I need to call your attention to our safe harbor statement on Slide 2 of our 1Q '19 presentation, which notes that this conference call may include forward-looking statements subject to risks and uncertainties.

In addition, we will refer to certain non-GAAP financial measures, which are reconciled to the most comparable GAAP measures.

Those reconciliations can be found on our Investor Relations website.

Additionally, please note that certain metrics discussed on the call today exclude transformation costs and other special items as described in our earnings materials.

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

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

CenturyLink closed the Level 3 acquisition about 18 months ago.

Since then, we've been integrating and building a new CenturyLink by focusing on a few key objectives: improving our customer experience and delivering value to our customers; focusing our efforts on products and services that drive profitable revenue and are closely tied to our very best asset, the fiber network; expanding the fiber network to reach more customers and to grow our on-net footprint not just to enable today's services, but because a rich and deep fiber network is essential for the services we know our customers will need tomorrow; and investing in transforming our business, dramatically improving the way we operate and reducing our cost structure.

Through these efforts, we've delivered another good quarter of adjusted EBITDA growth and margin expansion to start the year.

Our first quarter adjusted EBITDA margin was 40.1%, which represents a significant 460 basis point improvement since we closed the Level 3 acquisition.

It's also the high mark since the fourth quarter of 2015, which was the last time CenturyLink reported adjusted EBITDA margin above 40%.

And we expect margins to continue to expand.

As I said before, we believe we have the best fiber assets in the industry, and we are continually investing in and expanding the network and our capabilities.

This quarter was no exception.

During the quarter, we connected nearly 4,500 new fiber-fed buildings to our network.

We expanded our edge computing capacity and added significant incremental capacity to our existing inner-city network.

Stop and think about that -- first that just for a minute.

We added 4,500 new fiber-fed on-net buildings in a single quarter.

We continue expanding the reach and capabilities of our network and have the ability to scale the network more efficiently than anybody else.

We also enhanced our product and service capabilities in cloud management, hybrid networking, Dynamic Connections, security and other areas.

Our transformation initiatives are well underway.

And as you saw, we achieved $128 million of annualized run rate adjusted EBITDA cost savings this quarter.

These savings came from a number of different projects.

While there's still more to do, we continue to see very tangible results in our efforts, and they affect our cost structure and our customer and employee experience as well.

We remain committed to our deleveraging objectives in the plan we announced on the fourth quarter call, expecting to reach our leverage target of 2.75 to 3.25x over the next 3 years.

Finally, based on our solid progress in growing EBITDA and our view of the business over the next several quarters, we reiterated our confidence in the full year outlook we provided.

As usual, Neel will update you on our detailed financial results for the quarter and then I'll provide an update on how we're viewing the market and the overall business.

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

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

Thank you, Jeff, and good afternoon, everyone.

Let me begin with our financial summary on Slide 5. We are pleased with our continued EBITDA margin expansion and the year-over-year EBITDA growth, driven by our focus on profitable revenue and cost transformation initiatives.

The financial guardrails and evaluation processes we have in place across the business units are working, and we are adding profitable and durable revenue.

We're off to a good start on our cost transformation initiatives, exiting the quarter with $128 million of annualized run rate adjusted EBITDA savings.

Despite a top line decline of 5%, we grew EBITDA of 3.7% year-over-year.

We expanded adjusted EBITDA margin to 40.1% this quarter compared to 35.5% at the close of the Level 3 transaction.

Based on our progress to date, we feel good about our financial performance and are reiterating our outlook for the full year 2019.

Turning to revenue on Slide 6. The total revenue in the first quarter declined 5% to $5.65 billion.

Before I get into sequential revenue performance, as a reminder, fourth quarter is seasonally strong and first quarter is when we typically see contract rerates primarily for our largest customers, mainly in wholesale and global accounts.

Additionally, we had higher than usual nonrecurring revenue of about $40 million in the fourth quarter 2018, benefiting the Enterprise and international and global accounts, or IGAM.

With that in mind, on a sequential basis, total revenue declined 2.3%.

Our IGAM revenue decreased 4.7% year-over-year.

Currency was a factor in year-over-year performance, as was the revenue impact from the large contract that was renegotiated in the second quarter 2018.

The combination of those 2 items impacted revenue by about $30 million.

Normalizing for those items, IGAM would've declined 1.5%.

Sequentially, revenue decreased 3.5% compared to an increase of 3.5% last quarter.

As I mentioned a moment ago, this was primarily driven by fourth quarter seasonality and strength in nonrecurring revenue.

Additionally, as is typical in the first quarter, we had rerates from some large customers.

Sequentially, FX was not material to our results.

Turning to our Enterprise segment.

Revenue declined 1.6% year-over-year.

Sequentially, we saw a 2.2% decline compared to an increase of 3.5% last quarter.

Enterprise also benefited from higher than usual nonrecurring revenue items in the fourth quarter.

In addition to seasonality, as expected, first quarter revenue was also impacted by the federal government shutdown.

Overall, Enterprise sales improved both sequentially and year-over-year and were particularly good in March.

March sales also benefited from the federal government ramping back up after the shutdown.

Our sales funnel is strong, and we feel good about all the leading indicators in our Enterprise business segment.

SMB revenue decreased 3.8% year-over-year.

Sequentially, revenue declined 0.1% compared to a decline of 3.7% last quarter.

While we are seeing preliminary signs of improvement, we're still in the early stages of transforming our go-to-market approach and improving execution.

This quarter's improved performance was partially driven by strength in nonrecurring revenue.

Normalizing for this onetime benefit, SMB would've declined 1.5% sequentially.

Wholesale revenue decreased 6.5% year-over-year.

Sequentially, we saw a decline of 3.4% compared to a 2.1% decline last quarter.

We typically see seasonal pressure in the first quarter due to rerates and grooming efforts by many of our wholesale customers.

This quarter, we had a large rerate with a carrier customer.

As part of that contract renegotiation, we also received a rerate on the services we buy from that carrier, which benefited our off-net expenses.

While this contract pressured revenue, it provides both of us with market-competitive rates for off-net services.

This impacted first quarter revenue by about $15 million and will have a similar sequential impact on second quarter revenue.

Overall, while first quarter revenue performance was in line with our expectations given typical seasonality and specific drivers that we highlighted on the fourth quarter earnings call, we think there is room for improvement in our revenue performance, especially given the scope and scale of our assets and capabilities.

Turning to consumer on Slide 7. First quarter 2019 revenue declined 8.1% year-over-year and 1.8% sequentially.

As a reminder, the consumer group now includes (inaudible) revenue, which stepped down by $18 million due to the adoption of the new lease accounting standard.

Adjusting for the new standard, sequential revenue would've declined 0.5%.

Within consumer broadband revenue, which represents 50% of total consumer revenue, grew 1.3% year-over-year and 2.7% sequentially.

First quarter performance was driven by our Price for Life offering and our focused strategy of increasing penetration of our competitive assets.

Going forward, we don't expect any material incremental benefit from Price for Life.

However, we are ramping up our micro-targeting efforts, and the results so far are encouraging.

In the first quarter, we saw a net loss of 6,000 total broadband subs.

This quarter's total was made up of declines of 83,000 in speeds below 20 megs and growth of 77,000 in speeds of 20 meg and above.

Within those gains, we added 47,000 in speeds of 100 meg and above.

Voice revenue declined 12% this quarter.

Going forward, we expect similar declines in voice revenue.

As a reminder, the other -- the decline in other revenue was driven by our decision to deemphasize our linear video product.

Turning to adjusted EBITDA on Slide 8. For the first quarter 2019, adjusted EBITDA was $2.262 billion compared to $2.181 billion from the year ago quarter.

As we think about sequential performance this quarter, in addition to typical revenue seasonality, keep in mind the $25 million EBITDA impact from the failed sales leaseback accounting change and $40 million of high margin nonrecurring revenue benefit in the fourth quarter.

We continue to expand adjusted EBITDA margins during the quarter, which grew to 40.1% compared to 36.7% in the year-ago quarter.

We remain focused on growing adjusted EBITDA and expanding margins on a year-over-year basis.

Since the close of the Level 3 transaction, we've seen a 460 basis point improvement, and we feel good about our ability to continue to expand margins over time.

As of the end of the first quarter, we've achieved $128 million of annualized run rate adjusted EBITDA savings as we begin our 3-year transformation effort.

Approximately 30% of the savings we have captured have been network expense related.

Integration and transformation costs incurred in the first quarter 2019 impacted adjusted EBITDA by $34 million and free cash flow by $64 million.

As a reminder, we expect to achieve $800 million to $1 billion in annualized run rate adjusted EBITDA savings over the next 3 years.

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

Moving to Slide 9. For the first quarter of 2019, capital expenditures were $931 million as we continue to invest in expanding our network footprint, our product capabilities and digital transformation initiatives.

In the first quarter of 2019, the company generated free cash flow of $315 million.

As is consistent with previous years, we see higher use of cash in the first quarter due to higher working capital associated with annual bonus payments, prepayments on maintenance contracts and payroll taxes.

Specifically this quarter, we had an extra payroll cycle.

As I summarized on the fourth quarter earnings call, bonus payments are higher compared to last year, driven by performance and timing of Level 3 bonuses.

Additionally, working capital was also impacted by timing of fourth quarter capital and other accrued expenses.

Overall, first quarter free cash flow is in line with our full year outlook assumptions.

Turning to Slide 10.

We exited the quarter with our net debt to adjusted EBITDA ratio at 3.9x.

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

We remain committed to our deleveraging objectives and reaching our target leverage range of 2.75 to 3.25x in the next 3 years.

Turning to the business outlook on Slide 11.

We feel good about the progress to date and we're reiterating all of our 2019 financial outlook measures.

Specifically, we remain confident about our EBITDA growth objectives and expect adjusted EBITDA of $9 billion to $9.2 billion and expect free cash flow of $3.1 billion to $3.4 billion for the full year 2019.

With that, I'll turn it back over to Jeff.

Thank you, Neel.

Neel provided the details, but in general, we're seeing strong demand in our business groups.

Our customers' networking needs require them to transport more and more bandwidth, whether to public clouds or private data centers, and to connect their worldwide locations with varying requirements for bandwidth at each location.

Our ability to meet their needs with our extensive product portfolio has been a differentiator.

We can solve our customers' connectivity challenges big and small, local to global, managed or unmanaged.

The array of solutions we provide gives us the ability to meet the particular challenges for each customer in each of their locations.

After a slow start, our sales ramped steadily over the course of the first quarter.

And in spite of things like the government shutdown and normal seasonality, sales were solid for the full quarter.

I believe it's a direct result of our assets, our product capabilities and our focus on the Enterprise market.

Starting with the global accounts management group within our international and GAM segment.

We did see somewhat of offsetting trends this quarter with growth opportunities for global connectivity offset by rerates for several of the largest hyper sale -- hyperscale customers.

As we have worked through the underwater contracts we intentionally terminated and have discussed previously, we're optimistic about the improving trajectory of this business.

Turning to Enterprise.

We've mentioned the effect of the government shutdown, but sales were strong within this segment.

Not only have government sales ramped over the last couple of months but have also -- we've also gained traction in the strategic Enterprise portion of the channel.

We expect revenue performance for IGAM and Enterprise to improve as we look to the second half of the year.

For small and medium business, we're making improvements in how we go to market.

We are collaborating more closely with our indirect channel and we have a focused and simplified our value proposition emphasizing fiber-fed buildings.

It's still very early days and we have work ahead of us, but our strategy is not that difficult.

If we have a building on our fiber network, we should have very effective solutions for small- and medium-size businesses in that building.

We need to keep adding buildings and then focus on our penetration rates.

From the very largest to the smallest companies we serve, I believe we are well positioned to meet their needs.

Looking at Wholesale.

As I've said for many years, our expectation is for the Wholesale business to decline over time.

I don't see any steep cliffs coming, but this business can be very lumpy, and we often see large settlements in 1 quarter that won't recur in the next.

That lumpiness makes year-over-year and quarter-over-quarter comparisons difficult.

But wholesale is critical to our success by giving us scale and scope that we can leverage as we serve our Enterprise customers.

In addition, we'll continue to partner with 5G providers as they begin rolling out their networks, pushing our fiber deeper and deeper into the network and closer and closer to our Enterprise and consumer customers.

For the Consumer business, revenue declined as expected this quarter, primarily from voice but also video as we continue rolling off Prism customers.

However, we did see broadband revenue growth and improved broadband subscriber metrics in the quarter sequentially and year-over-year.

Our customer experience and profitability have benefited from many of our actions like eliminating unprofitable products such as Prism and stream; stopping unprofitable network expansions with bonding and vectoring technology that, even when completed, do not provide a competitive infrastructure; simplifying our products and pricing; expanding our fiber footprint in micro-targeting efforts; and increasing penetration where we already have fiber.

We will continue to operate this business for long-term cash flow generation.

That means we will continue investing where we can grow and expect growth where we invest.

We're also investing in our CAF II footprint, both by adding homes within the CAF serving area and by targeting what we call halo neighborhoods in areas adjacent to CAF builds.

We've done well with penetration rates in these locations.

Regarding the recently announced rural digital opportunity fund, it's early but we look forward to bringing even more broadband to underserved areas.

CenturyLink receives about 1/3 of the CAF II funding and we plan to be engaged as the rural digital opportunity fund develops.

Our customers have benefited from CAF funding, and we expect the same under the new program.

Turning to Slide 4 in our earnings presentation.

I talked many times about our purpose-built multi-conduit infrastructure with technical facilities distributed across the country that allow us to own, operate and extend what I believe to be the world's greatest fiber network.

Recent public and private announcements even further highlights the value of our fiber-based networks.

As I mentioned last quarter, CenturyLink owns and operates nearly all of the major next generation long-haul fiber networks ever built in the U.S. We also own and operate incredibly rich and dense metro fiber networks with technical facilities distributed deep within the markets we serve.

We have more than 150,000 on-net Enterprise buildings on our global network, which we are adding to every day.

We connect to more than 2,200 public and private data centers and have connectivity to approximately 60 web scale data centers.

We believe there is tremendous embedded value in these assets, a view that is validated by the multiples at which these types of assets have transacted.

As the operator of these assets, CenturyLink is in a very unique position to take advantage of the technology, evolutions still ahead of our Enterprise customers.

We talk a lot about legacy revenues.

And yes, we were exceptionally good at selling and providing legacy services to our customers.

But we're exceptionally good at leveraging our fiber networks and next generation capabilities to provide services our Enterprise customers need, the 100-gig waves and SD-WAN services of today through the dynamic bandwidth and low-latency edge computing world of tomorrow.

Wherever our customers want to go in the digital world and however they want to get there, our global fiber network can take them.

We are a purpose-built network for AI and big data world.

We are a purpose-built network for the fourth Industrial Revolution.

Our robust network and diverse product set are the key reasons why we've been growing our sales funnel.

We regularly hear from customers that our scalable network uniquely positions CenturyLink to meet their needs from growth in bandwidth demand, cloud computing and hybrid networking.

Clearly, we believe we have assembled an extremely valuable collection of fiber-based assets that are very capable of supporting future revenue growth and continued market share gains.

Now at the same time we are intently focused on those growth opportunities, we also continue to evaluate our asset portfolio to assess whether there are better ways to create shareholder value.

Generally speaking, in making these assessments, the more Enterprise focused, network related, fiber-based and growth-oriented a product line is, the more core it is to our future.

As I briefly mentioned on our fourth quarter call, we've been open to looking at assets like our Consumer business.

We have now engaged advisers to assist us in that review.

Let me be clear.

We're early in what I expect could be a lengthy and complex process.

During our review, we will not modify our normal operations or our investment patterns.

I can't predict the outcome or the timing of this work or if any transactions will come from it at all.

Our focus though is value maximization for shareholders.

If there are better paths to create more value with these assets, we will pursue them.

But as you can see in our broadband results, our team is doing a very good job of growing where we invest, improving the customer spending experience and expanding the network profitability.

We are well prepared to continue to operate these assets, investing in them where we can grow and investing and driving efficiencies both to improve the customer experience and expand operating margins.

Stepping back and looking at the overall business, we are transforming how we operate.

Product development and enhancements are a key part of our transformation initiatives.

We made investments to better serve customers, operating in single or multi-cloud environments, investments in our SD-WAN and adaptive virtual services portfolio and our connected security capabilities.

For example, we've expanded our hybrid networking capabilities, including new countries internationally.

We've enabled virtual implementation within customer cloud environments with the largest public cloud providers; developed an offering optimized for our small business customers; continued to expand our Dynamic Connections capabilities, which enables our customers to turn capacity on and off on demand; rebranded and expanded our connected security offering to our Black Lotus Labs solution, adding threat-informed defense capabilities.

We also made progress with our digital transformation initiatives this quarter.

For example, following the launch of our federal customer portal, we were the first telecom company to be granted an authorization to operate on the federal government EIS program.

We launched our consolidated inventory platform for federating the various inventory systems within CenturyLink.

We integrated all our national network maintenance into a common customer notification tool, deployed a platform to automate fiber-based Internet asset -- access installations and completed new quote to order capabilities, making it simpler for our sales team.

Not only are these initiatives having a positive impact on our customer and employee experience, but they're driving cost transformation as well.

As Neel and I have both already noted in the first quarter alone, we achieved $128 million of annualized run rate adjusted EBITDA transformation savings.

We have much more to come, and we are well on our way to our goal of $800 million to $1 billion over the next 3 years.

With that, we'll open it up for questions.

Operator, would you please explain the process?

(Operator Instructions) Our first question comes from the line of Philip Cusick of JPMorgan.

I can't help but ask for more on the strategic options for consumer.

Let me just think.

Would you consider separating the network and services businesses for consumer?

Is that attractive at all?

And then also would you consider selling maybe just the fiber within that business and hanging onto copper?

Or is that too hard as well?

It's early in the process, Phil.

And I don't think that we have blocked out any alternative that makes sense, but it's really early in the process for us to go into too much detail about what that might look like.

We are very open though to figuring out how to maximize value for our shareholders by looking at the business with kind of clear eyes, clean eyes.

That makes sense.

And then as long as we're on it, maybe in the consumer broadband business.

How many of those sub 20 megabit per second broadband subs remain?

And what percent are competitive with cable?

So for -- if you look at 20 megs and below, I think we are at about 55% right now and it was at 60% not too long ago.

So in general, those are declining, and 20 megs and above subs are growing.

So I think -- but again, if you subsegment that, there are areas where 20 megs is competitive.

So that goes back to our micro-targeting approach.

We're being very focused on the assets that we think drives long-term value.

So if it's in an uncompetitive market, we're not burning a lot of sales cycles for anything less than 20 meg.

Right.

But can you give us some kind of split between that 55% of what competes with cable and what portion doesn't?

Even a rough number?

Sure.

If you look at -- a big part of that competes with cable.

So yes, we're competing with cable on an everyday basis.

And then it also includes -- all our cash areas usually will be lower speed in the 20 megabit range.

Our next question is from the line of Simon Flannery of Morgan Stanley.

I wonder, Neel, if you could just talk a little bit about the free cash flow.

I think you went into some of the working capital moves there.

But how does it -- what's the shape of the free cash flow over the balance of the year?

And how are you thinking about what you're doing with the balance sheet?

I saw there was a drop in the long-term debt in the quarter.

But how do you think about reducing maturities over time and changing the structure of your balance sheet?

And any details on what the incremental CapEx, what the new projects are that is driving the increase year-over-year?

Sure.

So on free cash flow, Simon, I think it largely is working capital.

So we had an extra payroll cycle.

Also the bonus payments to the entire company was a lot higher this year compared to last year based on EBITDA performance.

That's one of the drivers for how we calibrate our bonus.

So just a peril in the bonus alone is a $300 million swing between first quarter of last year and first quarter of this year.

Plus if you remember in fourth quarter, we ramped up quite a bit of capital spending towards the end of the year and that cash kind of went out in first quarter.

So it's primarily working capital for first quarter free cash flow performance.

But overall, we feel pretty good about free cash flow for the full year.

In terms of your question on interest expense and debt, keep in mind that when we -- the interest expense guidance that we provided, we announced our new capital allocation plan at the same time, so that kind of factored in there in terms of what we think the outlook is going to be, although rates have come down, so we get a little bit of benefit on the floating-rate side.

But -- so maybe a little bit towards the lower end of the range from an interest expense perspective.

But we'll be opportunistic on that.

So if you just look at -- from -- since the close of the Level 3 transaction to now, we went from 4.3x to 3.9x.

If you just look at the underlying math there, LTM EBITDA growth of $400-plus million and reducing debt of over $2 billion.

So we feel good about the right path and we'll continue to work on that.

And in terms of incremental CapEx, the first point I'd make is we'll be success-based.

And in some of the areas that Jeff highlighted, we'll continue to expand on network.

We believe fiber is a long life asset, so we'll continue to build network.

We're investing in our product capabilities and we're investing in our digital transformation.

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

Just following back on the question about the strategic exploration for the Consumer business.

So you chose to define the exploration as consumer.

What's the possibility that, that gets expanded to the term ILEC just given the complexities that the management team has previously talked about between the Consumer business and the network?

So just a follow-on to the earlier question there.

And then secondly, if you look at the new segments by service type and you look at the updated disclosures, is there a way to think about if you go a few years out, where you see trough revenue in the legacy revenue items just to give us a sense of how big the headwinds could be on a multiyear period of time?

And then we could conceptualize what's happening on the strategic side of the business, some of the products and the focus that you described you're making between new buildings, new fiber routes and customer wins.

Sure.

So let me take the strategic exploration question first.

Again, it's early in the process and so I don't want to say this is the answer or that is the answer.

Is it possible?

And I'm going to interpret your question, Mike, to say the small business and the Consumer business in some market as a LEC business, is it possible for us to look at that as a LEC business and think about it as a collective?

Sure it is.

But it's early in the process.

And I get the desire for everybody to say, well, what are the potential answers?

But I'm not ready to say the potential answers because we want to go through the process and we want to evaluate what's the best way to create value for our shareholders and be open to any of those without [precluding] any before we even start.

Neel, do you want to talk about segments?

Sure.

So we provided a fair amount of additional disclosure on the product by segment.

So if you think about the Consumer segment like we highlighted, the area that we're really investing is in broadband.

So it's all about our micro-targeting strategy there and we'll focus on improving the revenue trajectory for broadband revenues.

In addition to just top line there, there are a lot of things we're doing in terms of the cost structure, in terms of how we turn up customers, self installs, the entire customer experience in that space.

Plus keep in mind, broadband, I think, enables over the top.

So we've gotten out of Prism and over-the-top streaming, et cetera, so we're offering a pure broadband product.

Voice will continue to decline and we'll calibrate the cost structure to maximize profitability in not only the variable cost but the fixed cost of taking switches out of the whole network.

Rightsizing real estate, et cetera.

So that's the consumer side.

If you think about the other segments, the true legacy there is voice.

And -- but there are some offsets like -- within voice, there is voice over IP, SIP and other things that are going.

But legacy voice is very large, so that gives you an idea of the size of the legacy revenue streams.

And our objective there will continue to be to maximize profitability.

Now there's private line and other services within transport, but customers move up and down those revenue streams and have been doing that for years.

So we're focused on growing the overall customer relationship for those products.

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

You mentioned the rerating of some of the contracts this quarter.

Can you talk a little bit about how that compares to some of the historical trends or maybe your expectations for the upcoming renewals?

And what gives you the confidence that the volumes will outpace this type of pricing pressure going forward?

So for large customers, we've always had this dynamic.

So this is nothing out of the ordinary.

I think the key point for us is when we rerate some of those services, it's still a good return on investment for us.

So yes, and we've seen that over the years as we rerate, especially when you think about IP services, CDN services, some of our other usage-based services.

We do have rerates.

Now it might take an additional quarter or 2, but the volumes will drive the revenue picture.

And then additionally, our cost to provide those services continue to come down from a capital efficiency standpoint.

So it's generally been a good decision for us in the past, and the ones that we had in the first quarter were in line with what we've seen historically.

And what gives us confidence that volume will outpace it is I talked about rerates from a couple of hyperscalers, which is exactly as Neel said.

That's just the nature of this business.

You grow to a certain scale.

We give rerates associated with that scale as they get bigger and bigger.

The vast majority of our customers, rerates are not that big of a driver for the vast majority of our customers.

And we see the demand for the products and services we sell.

There is nothing letting up about fiber-based services, about IP-based services, about MPLS and SD-WAN.

And what we're actually seeing with respect to MPLS and SD-WAN is what I've been saying for the past year, which is they go together, that our SD-WAN customers are wanting to buy MPLS.

And some very high percentage of those SD-WAN customers are buying 2 or 3 of our products at the same time.

And so the demand for our services is continuing to grow.

We do have rerates.

We do have the transition from voice technologies and other things as customers move to voice over IP.

But we're pretty confident in our ability to win the business.

And Batya, just one other data point.

I think if you look at international and GAM where most of the rerates were, it's down sequentially from fourth quarter but it's roughly flat to third quarter.

So keep in mind fourth quarter, we had a fair amount of nonrecurring favorability.

But even with the rerates in first quarter were about flat to third quarter.

Got it.

And just to follow up on that.

Do you expect another step down in the second quarter and then to -- for more stability in the second half of the year for both on the international and the wholesale segment?

Well, on the international and GAM, I think we'll see some pressure in the second quarter.

But to your point, it depends on how much volume offset we see in the second quarter or not.

But generally, we feel good about the second half of the year.

For IGAM and Enterprise.

Yes, for IGAM and Enterprise.

Wholesale will -- like you have said, will continue to have pressure.

We have our wholesale voice business there.

So wholesale will be lumpy but on a trend line basis, it will be slightly down every quarter.

And we think we do really well in the Wholesale business.

And I think we have a great team.

I think we have great network, great assets.

And yes, it declines over time, but that's the nature of it for the last 10 years at least.

And we do pretty well in managing that decline.

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

I guess one of the unintended consequences of your announcing this kind of strategic review the same day that Zayo agreed to be sold is that we're all going to try to tear apart your business and create a sum of the parts analysis.

And if you're contemplating selling the "Consumer business" or maximizing value or servicing value in that business, it would be super helpful for us to kind of understand what you guys think the separation of EBITDA is between the consumer and the non-consumer business so that we can kind of go to work on that sum of the parts analysis.

And I guess the second question would be, independent of kind of that review -- thank you for all the new disclosures.

If you do the math, 66% of your business is non-voice, IP, transport, IT services.

And the other 33% is kind of voice in all the various business divisions and regulatory and other.

What are the margins on those businesses?

So we can kind of understand as those businesses change and evolve what they contribute today, what the pressures are that you face from those kind of declining businesses that are the 1/3 that's the voice and the regulatory and the other and the opportunity that is represented by the 2/3 of the data and the other services that are growing?

Sure.

So we'll consider the comment on how do we give you better visibility into the Consumer business.

I do appreciate that you noticed that we're giving more disclosures at the same time that you said we're not giving enough.

Sorry.

Sorry, Jeff.

Because I'm an analyst, that's what happens.

It's all right, Dave.

With respect to how I would look at kind of the sum of the parts, one of the messages I'd want you to hear today is that we have embedded within CenturyLink assets that have tremendous value that I don't think are being recognized today.

And so as you look at some public transactions, some private transactions, other things that have gone on in the industry, I think you can look at CenturyLink and go, there's a bunch of assets within CenturyLink that we're not giving full credit to the value of those things over time.

And part of our efforts in the Consumer business is to make sure that we're maximizing the value there.

But it's also to make sure that we are continuing to focus on the Enterprise business, that fiber business, that fiber network and expanding all of those capabilities and the products and services that we sell to the market.

With respect to the percentages, I'll let Neel...

Yes.

So I think in terms of the EBITDA from the Consumer business, that is going to be part of our assessment, and it depends really on where you draw the line.

And so as you can think about part of the reason why it's complicated is because we do have a shared network and a lot of shared operations in terms of field, in terms of how we turn up services, et cetera.

So that's why it's not a simple question in terms of what the EBITDA is.

Again, it depends on what part of -- what pieces we decide to carve off.

With respect to your question on margin, I think a big part of that is not just the direct margin from the decline in the growing services.

It goes into our entire transformation of the business.

So if you think about voice revenues declining, yes, it's very high margin.

But not only do we take out the variable cost or transforming the entire infrastructure from a network standpoint, we're collapsing voice switches, we're rightsizing real estate facilities.

So there's a lot of fixed cost that come out of the network.

And that's going to be an ongoing effort for us.

Similarly on the services that grow, it's not just the gross margin because yes, we're focused on, on-net services but we're changing the cost structure in terms of how we deliver those services.

So in terms of how much customers can turn up services on their own, how much they can [do moves that changes], things like that, all those things are very OpEx intensive.

So it's a -- and that's why we focus on the overall EBITDA growth.

So it's not just a simple math exercise.

It's all the things that we're doing every day.

Okay.

So just to be clear, there were no numbers in that answer, then.

Well, the $120 million -- $8 million is a good example of the kind of things that we can do from a transformation standpoint, David.

Our next question comes from the line of Matt (sic) [Mike] McCormack of Guggenheim Partners.

I always wanted to be Matt, but I guess -- I was just thinking about the Consumer business, and I guess I won't comment further on whatever the EBITDA contribution, free cash flow contribution.

But I'm assuming there is some sort of connection there with dividend policy.

How should we think about that in light of your strategic moves on consumer?

And then on the Wholesale business, we're hearing a lot about competitiveness from the big 2, I guess, AT&T and Verizon, getting much more aggressive there and trying to win back share.

I just wonder if you guys are seeing the same thing and whether that's a pressure that you expect to persist?

Obviously, you talked about a 2Q pressure, but is that going to be more long-lived pressure, if you will?

So I'll -- welcome to the call, Mike.

But I'll take the wholesale question first.

We win Wholesale business day in and day out.

I really don't care what any of our competitors do in the market because we have great assets, great products, great capabilities, an excellent team to execute and we're going to win the Wholesale business because we win the Wholesale business and people can go do other things.

In the Enterprise business, it's a little bit harder because if we're trying to take customers from a big company and they can do a paper write-down and not really change anything, some customers can get by with that for a while.

Ultimately, it doesn't work because customers need to evolve to new capacities and new technologies.

But our wholesale customers, we don't even see that dynamic.

And so from a wholesale perspective, we win pretty aggressively.

With respect to the consumer and the dividend policy and all of that, our dividend cut that we announced on the fourth quarter call had to do with reinvesting in our network business, the size of our dividend that we were going to pay going forward to our -- to return value to shareholders and then paying down debt.

We'll see if decisions around the Consumer business have some sort of impact on that.

They have no impact on it right now whatsoever in any way.

And I'm not predicting one way or the other because I don't even know, as I said, whether we'll do a transaction, what that transaction might look like, what the timing of it would be.

We're early in this process, and we'll continue to look at it.

But recognize that our dividend is important to our shareholders and we're still returning about $1 billion -- a little over $1 billion of dividend to shareholders today.

Our next question comes from the line of Matthew Niknam of Deutsche Bank.

Just 2 for me.

One, just to go back on the revenue trajectory.

How do we think about the trajectory for year-on-year growth from here on out?

And I ask it because you talked about sales ticking up.

You're obviously going to start lapping some of the unprofitable contracts loss that you shed last year.

So I'm wondering how we should think about the revenue growth, this 5% this quarter, the [trough sink].

Should we anticipate a little bit of improvement from here?

And then secondly, on margins, maybe a question for Neel.

You talked about 5 to 7 percentage points of expansion in the past relative to when the deal closed.

You've obviously got 460 bps thus far and revenues remain under pressure.

So can you help us think about how much incremental room is left on the margin front?

Yes.

So on the margin one, we still feel good about the 5% to 7% and we see enough levers in the pipeline so when we get to the -- that range, we'll reevaluate it and see if we can do more.

But our objective is to continue to grow EBITDA, EBITDA margins.

And we see enough levers that we feel good about it.

In terms of your question on growth, I think the way to answer it maybe, if you look at our international and GAM business and our Enterprise business, we feel good about the leading indicators that we see.

And we expect better performance, sequential performance in the second half of this year for both of those business units.

In the SMB business unit, we made a lot of operational changes.

We're focusing on selling more into our on-net footprint.

We're seeing some preliminary signs but maybe too early to say that whole trend will continue.

But over time, we expect to see growth in that business.

But we can't say if that's second half of this year or next year, so -- but in general, those 3 business units, we -- or segments, we expect to grow over time.

And then consumer, we're focused on the broadband component of that business and then the voice part will decline.

And then wholesale, like I mentioned before, will be slightly down.

Hope that answers the questions, Matt.

And as you know, we don't provide specific revenue guidance.

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

First, some suppliers to the big cloud service providers and hyperscalers have seen a moderation in growth from those customers like chip and storage vendors and some of the data center companies.

You noted some rerate this quarter, but are you seeing any changes in the underlying purchasing behavior from these guys?

I think lumping them all together and categorizing them all the same may be doing them a disservice.

In general, no.

If you think about their businesses and what they're doing and their need for our types of products and services, we're seeing ever-increasing demand.

If you think about our cloud application management product, that's us going to the Enterprise market to say we know multi-cloud environments are going to be very real for our Enterprise customers.

How do we make it easier for you to operate in that environment?

We have to have connectivity into the cloud providers to do that.

We have to have connectivity into our customers to give them those capabilities.

But we see the demand there from our Enterprise customers and the cloud providers and the hyperscalers.

If you think about Dynamic Connections and the ability to scale bandwidth up and down and redirect it from one provider to another, those are continuing to grow for our Enterprise customers because the need is continuing to grow from the cloud providers.

And so I don't see any underlying demand changes from the cloud providers.

And I don't see any underlying demand changing from the enterprises that want to get to those cloud providers.

Now as I say that, are there always times when somebody buys a CDN service and then buys a 100-gig wave and then buys [start] fiber?

Yes, there's natural evolution to products within those.

But I don't see any fundamental demand shifts.

Okay.

Got it.

That's helpful.

And then going back to the Consumer business.

You had considered separating that unit in conjunction with the deal but decided not to.

What's happened since that time that caused you to reconsider?

Is it just the performance of the stock price?

Or has something else changed?

No, I don't think we are reconsidering.

I think that my approach has been let's make it run really well.

And then after we get it running really well and after we have a clear outline to the path that we can even take it from there, then let's consider does it make more sense inside of CenturyLink or does it make more sense outside of CenturyLink?

So I think we've made great progress in doing that.

We have -- the great news for me is we have a lot of opportunities still left to improve, and I like that.

I like the ability to continue to improve that business.

But I think our team has done a phenomenal job, as you can see in our Price for Life initiatives that have multiple benefits.

They make the customer experience easier.

They take out cost because we don't have to deal with as many calls from customers.

They make the customers happier because they don't see bill changes.

They have multiple benefits from that.

And by the way, it's direct driven ARPU.

So we see those types of initiatives, thought that were a lot of things that we could do, thought it was better to fix them up front and then evaluate more effectively over time.

And so I don't think there's any difference in strategy.

There's nothing about our operating performance that's causing us to decide we want to sell it.

In fact, our operating performance says, hey, you're doing a good job.

Keep running it.

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

So looking at maybe your data center assets, is that something that you would consider spinning off as well as the consumer or doing a transaction there?

I believe you still have quite a bit of space besides what you sold to Cyxtera.

And then I want to circle back on the outlook for CAF II.

Do you expect to be bidding as aggressively in the next round of the CAF funding as in the last one?

And how successful has that been for you so far?

All right.

I'll take the first 2 and then, Neel, I don't know if you want to answer on how successful, but I'll give you my opinions on both of these.

Data center assets, would we sell data center assets?

If we can maximize shareholder value by selling some of our data center assets, we will do that.

Yes.

If you look at our edge computing strategy, we think there's a great opportunity for us to get very close to the edge of the network, and I'm talking from a latency perspective, 5, 10 milliseconds from all of our customers and put edge computing facilities at those locations.

Would we be interested in selling those?

Probably not because we think there's such a great opportunity as the market for those needs evolve and that we have such a unique set of assets to do that.

But if there are big data centers in the market where we think that somebody else can maximize the value better than we can, we'd be open to selling it.

Just like we were when we sold the data center assets to Cyxtera.

With respect to CAF II and how successful or how aggressively we will bid in the rural digital broadband opportunity fund, whatever it's called, I don't know.

It's early.

We'll see.

If we've got great footprint and we can expand our footprint either through fiber or wireless solutions, which we've been looking at pretty aggressively for CAF, if we've got a great footprint and we think we can win and we can provide service to customers in an effective way, then yes, we will.

But I don't know.

It's still early in the process.

With respect to my opinion on whether CAF II has been successful or not, I'd say yes.

I'd say yes.

I think it's successful for our customers.

I think it's good for our company.

It gives us the ability to augment capacities in ways that we wouldn't be able to afford to otherwise.

We have obviously, again, using wireless technologies and more efficient technologies, looked at ways to get more for less and deliver more for our customers for less capital cost.

But I do think it's been good for us and we've been successful in it.

I think you covered it, Jeff.

I think we see pretty high penetration.

And by definition, these are underserved areas.

So we see very high penetration not only in the actual CAF units, but like Jeff mentioned, where we call the halo units, the units that are around the CAF units.

And is the penetration higher than your...

Yes, Frank.

We're higher generally than comparable margins.

Our last question comes from the line of Brett Feldman of Goldman Sachs.

Two.

The first one is the goodwill impairment charge.

Does that increase your NOLs?

And if so, does it change the timeline for when you would expect to be a full cash taxpayer?

And then second, just as we try to get our arms around the Consumer business even more, can you give us any insight into the extent to which you deliver services over fiber connections?

So for example, how many of your broadband connections are fiber-to-the-home or how many homes passed are passed with fiber?

Anything like that would be very helpful.

Yes.

So on the goodwill revenue, no impact to taxes and no impact to NOL.

That's just write-down on the goodwill primarily driven by, just to oversimplify it, sustained lower stock price.

And so market cap versus carrying value of equity, no impact on taxes.

In terms of consumer, we haven't given that out, the fiber-to-the-home.

So we'll take that into consideration.

But we do -- I mean our focus is building fiber, building fiber in places that it makes sense.

And makes sense means [aerial] locations, high density.

That's where our micro-targeting comes in and it's not across a market built fiber.

It's very select where we can build, how we can expand.

And then we get very aggressive in how we penetrate that footprint and we're seeing, as Neel said, in early efforts, we've seen some pretty good results there.

Is that one of the things that's being looked at as part of the strategic review?

Which is should we maybe push the gas pedal harder on fiber?

Or do you think that the areas where it's very obvious you should do fiber you've already hit?

And from this point forward, it is much more incremental?

Yes.

I think we're already -- we're not changing anything we're doing operationally.

So we are leaning in and investing in extending the fiber network.

I would also say that even in the fiber assets that we currently have, there is an opportunity to really improve our penetration.

And so we're focused on that.

To your earlier point, we're focused on improving the overall operations on -- for the Consumer segment.

And the strategic review will have no impact or -- in change of direction.

But when we do the review, it will be able a holistic look.

And we're also trying to figure out how do we take the needs of multiple customers and package them together.

So for example, our 5G customers.

How do we take 5G, package what we're building for 5G in with our Enterprise customers and adding new on-net building?

How do we package that in with our consumer customers?

And can we get fiber closer to our consumers, make it more effective?

Multiple dwelling units especially come to mind and -- for consumer.

And so how do we leverage all of those customer needs to build the infrastructure?

And if that tells us to apply the gas, we will.

Before we wrap up today, I'd like to just conclude with a couple of key points, a few key points.

We've been focused on growing adjusted EBITDA and we delivered on that objective again this quarter.

We reiterated our full year outlook for adjusted EBITDA and free cash flow.

We know declining revenues are always a concern, but we're expanding margins and increasing adjusted EBITDA dollars by focusing on profitable revenue and taking out unneeded costs.

We've made considerable progress this quarter on our transformation initiatives and the associated cost savings.

But know we have a lot more work and more opportunities ahead.

We have a solid quarter of sales and a strong funnel.

We're seeing signs of improvement in future revenue performance and expect a better second half of the year.

As Neel mentioned, we've made good progress reducing debt since the close of the Level 3 transaction, and we remain committed to our deleveraging objectives.

As we look at increasing shareholder value, we are looking at strategic options to determine the best way to create value with our asset portfolio.

In the meantime, we're working diligently to operate the business in maximum efficiency and long-term return of free cash flow.

And finally, before I conclude the call, I'll remind you that as always, our guiding principle is growing free cash flow per share.

Thank 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.