Lumen Technologies Inc (LUMN) 2019 Q2 法說會逐字稿

Greetings, and welcome to CenturyLink's Second Quarter 2019 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded today, Wednesday, August 7, 2019.

It is now my pleasure to turn the conference over to Valerie Finberg, Vice President of Investor Relations.

Please go ahead, Valerie.

Thank you, France.

Good afternoon, everyone, and thank you for joining us for the CenturyLink Second 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 2Q '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 in our earnings press release or our supplemental schedules.

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

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

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

On today's call, I'll give you an update on the state of the business.

Neel will provide an overview of the quarter's financial results, and then we'll go directly to your questions.

I'll start by saying during the quarter, we continued to improve our customer experience, increased our business in wholesale sales sequentially and expanded our adjusted EBITDA margins to 40.7%.

The quarter's results continue to validate the core tenet of CenturyLink.

By delivering outstanding products over a world-class infrastructure with a primary focus in operational excellence, we can drive revenue, margin expansion and bottom line profitability.

While we have a long way to go to simplify and streamline our internal operations and our customer interactions with CenturyLink, we certainly see the tangible results of our efforts that benefit both customers and shareholders.

Since the close of the Level 3 acquisition, our adjusted EBITDA margins have expanded by more than 500 basis points.

And as we said previously, we already have identified $800 million to $1 billion in run rate transformation savings.

As of the end of the second quarter, our transformation initiatives delivered annualized run rate savings of $290 million, and we believe our results validate our ongoing ability to find, capture and generate savings while focusing on profitable revenue growth.

During the quarter, we made good progress in our deleveraging objectives and our leverage ratio of net debt to adjusted EBITDA is now 3.8x.

We feel confident in our ability to meet our leverage target of 2.75 to 3.25x within the next 3 years.

From a revenue perspective, while year-over-year total revenue declines increased slightly, we saw improvement in sequential total revenue performance.

We also saw improved revenue performance in IGAM and Enterprise both year-over-year and sequentially.

While you've heard me say before that progress is never linear given the leading indicators in service delivery, sales and our sales funnel, we continue to expect revenue for IGAM and Enterprise to be higher in the second half of this year compared to the first half.

I've mentioned on previous calls that we're investing to meet our customers' growing and evolving needs.

CenturyLink has what I believe to be the world's best, most scalable and efficient fiber network.

However, we continue investing and working hard to expand our infrastructure, broaden our service capabilities and create a better digital experience for our customers and our employees.

We also recognize that our customers' needs are continually evolving as technology advancements drive changes within their operating models.

I thought I'd give you a few recent examples that illustrate where we see the market going and how we are investing to drive growth in our business.

As I mentioned last quarter, we added 4,500 new fiber-fed buildings to our on-net footprint in the first quarter of 2019.

We continued that focus in the second quarter with the addition of approximately 5,000 new fiber-fed buildings.

For contrast, Level 3 used to add something closer to 500 buildings per quarter, so I want to emphasize expanding our fiber footprint is a major area of focus for us.

We know that when we have a building on-net, our fiber-based services provide a better, more reliable and higher-margin solution than competing infrastructure.

Fiber beats twisted-pair copper.

It beats hybrid fiber coax and it beats wireless, whether that's 5G or not.

Fiber wins.

It's highly flexible in increasing speeds.

It is secure and really is the basis for all the other competing technologies.

We just do one thing differently.

We take fiber all the way to the customer, and customers always want fiber when they can get it.

You can expect us to continue investing to expand the reach of our access fiber network.

Beyond just being a superior technology though, fiber is well suited to meet the demands of emerging opportunities driven by artificial intelligence, machine learning and big data applications.

Fiber-based solutions are better able to satisfy what we see as 4 key market trends: the need for highly scalable capacity, now ranging into multi-gigabits per second; the need for connecting an increasing number of widely distributed locations; the need for the network itself to protect the privacy and security of our customers; and finally, the need to move bandwidth-intensive computing resources closer and closer to the edge to reduce latency and unnecessary backhaul of traffic.

Expanding our on-net building footprint certainly helps us meet these needs, but we've implemented a number of other initiatives to ensure CenturyLink maintains our position as the premier fiber-based provider for Enterprise customers.

Turning to Slide 4 in our presentation.

Last quarter, we showed a similar map illustrating our North American subsea fiber routes.

This is a unique asset, and as I said earlier, we believe it represents the world's most scalable and efficient fiber network.

However, we are further augmenting our capabilities.

We also own an extensive and unparalleled conduit system that we leverage to bring the latest generation fiber capabilities to market with extraordinary speed and economic efficiency.

Each of the long-haul networks we've acquired, Level 3, Qwest, WilTel, Broadwing, all had multi-conduit builds.

Within the Level 3 network alone, we built 12 conduits to ensure we had sufficient space to grow and evolve as capacity in fiber technology evolve.

Most of those conduits are still available for further network augmentation.

But we've also interconnected all of those conduit systems to cherry-pick the shortest and lowest latency pads across the country.

As illustrated on Slide 5, we recently announced the deployment of Corning's latest generation of ultra-low-loss fiber to build the world's best, most scalable optical infrastructure.

This new technology enables higher capacity and more efficient optical design than earlier fiber technologies.

Coupled with the selecting the shortest physical path between any 2 end points, we also improved latency significantly, which is a key factor for hyperscalers, bandwidth-intensive enterprises and dark fiber customers.

We've completed 3.5 million miles of our current plan to build a total of 4.7 million fiber miles with ultra-low-loss fiber roughly 75%.

We continue to see demand for additional routes, and we'll consider those to meet future customer needs.

We recognize that access and long-haul transport are only part of the solution.

There's increasing demand for computing capabilities at the edge of the network, and we believe we are uniquely positioned to capitalize on this market opportunity.

In addition to our far-reaching fiber network, we operate a large number of edge locations that are well suited to enable edge computing.

In the coming weeks, we expect to announce the details of our investments in our widely distributed and extremely well-connected edge computing infrastructure.

Let me give you a specific example from a customer of what fiber-based edge computing capabilities can mean for them.

Slide 6 shows an actual customer with close to 2,000 nationwide locations.

We are working with this customer to evaluate the effectiveness of our edge computing solutions to more efficiently run applications and process huge amounts of data very close to the origin of that data.

On this slide, you can see that our existing infrastructure is positioned within 5 milliseconds transport time for 95% of their sites.

This means that the customer's applications and data can be processed more efficiently from 100 or so of our edge locations rather than processed on-premise at 2,000 separate sites, even worse for the customer or backhauled to a central location.

In addition, our dynamic networking capabilities can provide real time network provisioning from the customer premise to our edge and then on to major cloud service providers.

This example is for a specific customer but the results are indicative of what we see from other customers we're currently working with.

This application can be an important solution for retail, banking, and really anyone that has a number of dispersed service locations that need to process large amounts of data in real time.

The combination of our fiber network with edge computing infrastructure and managed services support is a very powerful and differentiated service offering.

I'm not suggesting that edge computing will eliminate the need for today's hybrid computing or hybrid networking.

To the contrary, our customers will continue to build and operate their own data centers.

We'll continue to move compute resources to public data centers and specific applications to cloud service providers.

Our customers want to dynamically manage their network and put different types of workloads in different environments.

Through our wide array of hybrid networking solutions, CenturyLink provides the flexibility to do so easily.

CenturyLink enables this flexibility with services like Dynamic Connections, which allows us -- our customers to make instantaneous changes to their network, capacity and configuration; and our Cloud Application Manager, which allows customers to manage their applications across hybrid cloud environments through a single seamless interface.

Our network was purpose-built to enable us to expand at the lowest cost in the industry, and that's a big advantage.

It allows us to go to market quickly and invest in these types of growth initiatives within the balance of our ongoing capital plans.

This efficiency is demonstrated in our ability to invest in all of these initiatives as well as other growth opportunities within the scope of the CapEx outlook we provided for the full year 2019.

Of course the purpose of these investments is to drive growth.

We are beginning to see the benefits of these capabilities improving our ability to win.

I'll give you another specific customer example of how investments in flexible scalable fiber-based connectivity are helping us win in the market.

We recently won a contract to provide secure cloud connectivity to the U.S. Census Bureau for the upcoming 2020 Census.

We'll formally announce this contract later this week.

To support the Census Bureau's objectives to provide the best mix of timeliness, relevancy, quality and cost for the data they collect and the services they provide, CenturyLink will help to collect the census digitally by providing the Bureau with managed trusted Internet protocol services or MTIPS at speeds of 40 gigabits and higher.

MTIPS, a Managed Security Service that provides secure cloud-based connectivity, will support the online system that will be available to all households completing the 2020 survey.

The solution also allows the Census Bureau to access the responses via secure cloud applications for the first time.

CenturyLink was selected by the Bureau due to our ability to meet their requirements for scalable connectivity and will play an integral role in helping the U.S. Census go digital in the most secure, reliable and cost-effective way as it takes an important mission of completing the 2020 Census.

The Census is obviously a unique example, but that's the point of hybrid networking solutions from CenturyLink.

Our customers can enable the capabilities to address their particular need.

This solution highlights our ability to provide scalable, flexible network solutions that we believe are defining the next generation of Enterprise networking.

Turning to our own internal transformation initiatives as I noted earlier.

We're making good progress in this area, exiting the quarter with around $290 million in annualized run rate savings.

We appreciate the cost efficiencies and we know they are substantial, but the cost savings are almost a byproduct.

The real value comes from the significant improvements in the service experience, both for our customers and employees, that result from an entirely digital interaction model.

These improvements not only enhance margins, they increase customer satisfaction, reduce churn and improve sales.

This work is as important as anything we are doing in the business, and we are very focused on doing it well.

Neel will cover the specific results of the Consumer business, but I will highlight that we are continuing to see success with our micro-targeting efforts.

As a reminder, we micro-target where we build fiber and are micro-targeting our marketing and sales efforts, too.

We are continually expanding these efforts in new neighborhoods and additional cities.

What we have said about our Consumer business still holds.

We will invest where we can grow revenue profitably, and we will grow where we invest.

We are seeing the benefits of this approach and have more than doubled the number of subscribers with services at 100 megabits per second and higher since the second quarter of 2018.

We will continue to push for higher market share in areas where we have invested to enable these higher speeds.

I'll also note that related to the Consumer business, we took a $15 million charge during the quarter in connection with a tentative settlement we reached in the nationwide consumer class action cases we've been defending since mid-2017.

The agreement remains subject to judicial approval, but we are very pleased to have a tentative resolution of the class action claims behind us.

We've been very focused on simplifying and improving our customer experience since before this litigation was initiated and feel good about the ongoing improvements we are seeing in that part of the business.

Before I turn the call over to Neel, I want to comment on the strategic review for our Consumer business.

Our internal team and our advisers are making good progress in the review.

With that said, as we mentioned last quarter, this will be a lengthy and complex process, and we do not intend to provide updates until we have determined the best path forward.

In the meantime, we are not modifying our consumer investment, and we are continuing to operate our Consumer business to transform it and the services we offer.

I'll also reiterate something I touched on last quarter, and that is that this process is not unusual for us.

We evaluate all aspects of our company on an ongoing basis to ensure we are using our assets to deliver the best value for our company and our shareholders.

If we see opportunities to drive higher levels of value with alternative approaches, much like you see us undertaking in the consumer review, we will do the work necessary to understand our options and implement the options to provide the best free cash flow per share return.

I'll now turn the call over to Neel to provide an update on our detailed financial results for the quarter.

After that, we'll open it up for your questions.

Neel?

Thank you, Jeff, and good afternoon, everyone.

I'll start with our financial summary on Slide 7. We grew adjusted EBITDA to $2.269 billion from $2.262 billion in the first quarter 2019.

We expanded adjusted EBITDA margin over 500 basis points to 40.7% this quarter compared to 35.5% at the close of the Level 3 transaction.

We were able to accelerate our cost transformation initiatives and delivered $290 million of annualized run rate adjusted EBITDA savings.

And based on our continued progress to date, we feel good about our financial performance and are reiterating our outlook for adjusted EBITDA and free cash flow for the full year 2019.

To put the first half of 2019 into perspective, we grew adjusted EBITDA by $80 million compared to the first half of 2018 while revenue declined more than $600 million over the same period.

This was driven in part by our focus on adding profitable revenue and deemphasizing unprofitable lines of businesses, managing legacy product declines along with synergies in our cost transformation initiatives.

Turning to revenue on Slide 8. Total revenue in the first quarter declined 5.5% to $5.58 billion.

Quarter-over-quarter, total revenue declined 1.2% compared to the 2.3% sequential decline we saw last quarter.

As I just mentioned, last year, during the course of 2018, we implemented guardrails to drive profitable revenue, which has led to difficult year-over-year comparisons.

Our IGAM revenue was roughly flat compared to the second quarter 2018.

Adjusting for FX, IGAM grew 1.6%.

Sequentially, revenue increased 1.2% compared to a 3.5% decrease last quarter.

We did see an impact to revenue this quarter from the contract rerates that we mentioned last quarter.

However, those revenue declines were offset by strength in nonrecurring revenue items.

Keep in mind, this group contains some of our largest customers and we could see revenue fluctuations in any given quarter based on rerates or renegotiations.

But over the long term, we feel confident in the trajectory of this business.

Moving to our Enterprise segment.

Revenue declined 1.2% both year-over-year and sequentially.

This compares to a decline of 1.6% year-over-year and 2.2% sequentially in the first quarter 2019.

Overall, looking to the second half of the year, for both IGAM and Enterprise, our sales funnel is strong and we feel good about all the leading indicators for revenue growth.

As such, we expect revenue for these 2 business segments to be higher in the second half of 2019 compared to the first half of 2019.

SMB revenue decreased 10% year-over-year compared to a decline of 3.7% in the first quarter 2019.

Revenue in the second quarter 2018 included a benefit from several nonrecurring items, making the year-over-year comp challenging.

Sequentially, revenue declined 2.5% compared to a decline of 0.1% last quarter.

As a reminder, in the first quarter 2019, we had particular strength in nonrecurring revenues.

The revenue declines in the SMB business are largely driven by legacy voice.

We feel good about our ability to sell into our on-net building footprint with a large addressable market opportunity.

Wholesale revenue decreased 8.8% year-over-year.

As we referenced last year in the second quarter 2018, wholesale revenue included a favorable dispute settlement with a large carrier.

Sequentially, we saw a decline of 1.8% compared to the 3.4% decline last quarter.

Slide 9 has our product mix by Business segment.

In both IGAM and Enterprise, we expect that sales growth in other product lines will offset legacy voice declines.

In the SMB segment, despite sales growth, given voice represents 45% of total revenue, the journey will be a bit longer.

Turning to consumer on Slide 9. Second quarter 2019 revenue declined 8% year-over-year and 1.7% sequentially, and is generally in line with the revenue performance we saw in the first quarter 2019.

In the second quarter, we saw a net loss of 56,000 total broadband subs with declines of 78,000 in speeds below 20 meg and growth of 22,000 in speeds of 20 meg and above.

Within those gains, we added 48,000 in speeds of 100 meg and above.

I'll also note that growth in our greater than 100 meg subs is up more than 100% on a year-over-year basis.

Broadband revenue for the second quarter of 2019 grew 1.8% year-over-year, which compares to growth of 1.4% last quarter, driven by our efforts to increase penetration in our competitive assets and investing in fiber.

Voice revenue on a year-over-year basis declined 13% this quarter compared to 12% last quarter.

The decline in other revenue continues to be driven by our decision to deemphasize our Prism video product.

Regulatory revenue is down year-over-year due to the adoption of new lease accounting standard.

Turning to adjusted EBITDA on Slide 11.

For the second quarter 2019, adjusted EBITDA was $2.269 billion compared to $2.271 billion from the year ago quarter.

Adjusted EBITDA margin expanded to 40.7% for the second quarter 2019 compared to 38.5% in the year ago quarter.

We continue to focus on adjusted EBITDA growth and margin expansion as we drive profitable revenue in our transformation efforts.

As of the end of the second quarter, we have achieved approximately $290 million of annualized run rate adjusted EBITDA transformation savings.

We are pleased with our ability to accelerate transformation savings in the first half of 2019 and feel good about our progress going forward.

Integration and transformation costs and special items incurred in the second quarter 2019 impacted adjusted EBITDA by $54 million and free cash flow by $55 million.

Overall, we continue to make progress in taking costs out of the business.

Excluding transformation cost and special items, if you look at our adjusted EBITDA impacting cost for the second quarter 2019, we have reduced cost on an annualized basis by roughly $1.3 billion compared to where we were a year ago and $2.3 billion since the close of the Level 3 transaction.

The improvement in our cost structure is driven by a combination of synergies, transformation savings and our focus on profitable revenue.

Moving to Slide 12.

For the second quarter 2019, capital expenditures were $800 million.

For the first half of 2019, capital expenditures increased approximately 10% to $1.73 billion compared to $1.58 billion from the year ago period.

As Jeff just mentioned, we continue to invest in our fiber footprint and product capabilities, positioning us to take advantage of existing and emerging market opportunities.

In the second quarter 2019, the company generated free cash flow of $956 million.

Turning to Slide 13.

We exited the quarter with our net debt-to-adjusted EBITDA ratio at 3.8x, which compares to 4.3x at the close of the Level 3 transaction.

We remain highly focused on getting to our 2.75 to 3.25x net leverage target over the next 3 years.

During the second quarter, we reduced outstanding debt by approximately $700 million primarily through a tender offer, open market purchases and term loan amortization.

In addition, we recently announced the redemption of $400 million in bonds that will close in late August, and we expect to pay down an incremental $400 million of debt at maturity over the next few months.

Overall, at this point, we have a clear line of sight to lowering debt by $1.7 billion through actions already taken or that are planned for the rest of the year.

Turning to the business outlook on Slide 14.

We feel good with our progress in the first half of the year and are reiterating our full year 2019 financial outlook measures for adjusted EBITDA of $9 billion to $9.2 billion; free cash flow of 9.1 to -- sorry, free cash flow of $3.1 billion to $3.4 billion and capital expenditures of $3.5 billion to $3.8 billion.

Please note that we slightly adjusted our outlook for dividends paid and depreciation and amortization.

In summary, we remain focused on execution, specifically on improving revenue trajectory for the second half of 2019, maximizing profitability and remain disciplined on our cost transformation and deleveraging initiatives.

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

Thank you, Neel.

France, would you explain the process?

(Operator Instructions) Our first question from the line of Batya Levi with UBS.

First, a little bit more color on the Enterprise trends if you could provide for the second half.

I believe you typically see higher CPE sales.

Can you parse out the improvement on regular services versus CPE?

And just a follow-up, I believe you mentioned a couple of nonrecurring items in IGAM and wholesale in the quarter.

Any chance you could quantify those?

And third, a lot of discussions on potential changes in terms of CAF subsidies that you collect right now.

How do you think about that going forward?

Would you -- what's the -- I believe you collect about $500 million on an annual basis right now.

Would you still be interested in participating in the auction next year?

Batya, I think there's a lot of questions in there, so if I missed any, come back.

So on Enterprise, if you think about our Enterprise segment, our sales in fourth quarter and January and February were impacted by the government shutdown, but we saw good sales in March and we saw good sales in second quarter of this year, so good sequential growth in sales, so given timing of installs, and that's part of the reason we feel good about the second half of this year.

On CPE, we really deemphasized unprofitable CPEs.

So our CPE revenue is down a fair amount on a year-over-year basis.

So the driver for Enterprise growth is really sales and installs.

Just to put that in...

And just to add, I apologize, Neel.

On the CPE, that's a conscious decision.

That's something that we intentionally did.

We still sell CPE, but we do it when it brings network with it, when we can do managed services and professional services, when we can do things to increase the margin around it.

But in the past, there were times when we would just sell CPE without any of those other services and we stopped doing that.

That doesn't make us money, distracts our organization, and that's one of the efforts around profitable revenue that we focused on.

Yes.

And if you -- just to put it into context, I think if you look at our Enterprise, year-over-year, we're down about 1.2%.

That's about $18 million or so.

And last year, we terminated a government contract that was unprofitable.

We deemphasized low-margin CPE sales, and we put a lot of guardrails around profitable business.

So in that context, we're fairly pleased with the performance of the Enterprise business, and the latter half of the year is driven by sales and installs.

In terms of IGAM, in the first quarter, I noted that we had a large renegotiation with a customer, a hyperscaler customer, and that drove sequential pressure on revenue.

But we did offset that with nonrecurring services, professional services and other things.

And that was, call it, roughly around $15 million or so.

And again in IGAM, we saw growth in sales sequentially, and we feel good about the second half of the year.

My comment on wholesale onetime was more related to the comment I made in first quarter.

We had a large carrier renegotiation in the first quarter that impacted revenue and we saw the full quarter impact of that in second quarter.

And if you are looking at year-over-year for wholesale, second quarter of last year had a large carrier settlement that impacts the year-over-year comparison.

And then with respect to the CAF question and whether we'll participate in the upcoming auction, the rule, the suggested rules have just come out.

We've got a comment period, I think, until the end of the year.

We'll look at it and we'll see if it makes sense.

And if it does for us, then we will participate in those actions.

And if it doesn't make sense, then we won't.

If you look historically, there are some times we participated and some times we didn't.

And so we will evaluate that as the rules get finalized and as we look at the specifics.

.

And the other thing, just to add to that, I think, keep in mind on CAF, there is a capital offset as well.

So to the extent that we were not getting funding at the revenue line, we're also not spending capital.

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

Can you just give us a sense of how much that is costing and what the time line is to get to completion there, and maybe any thoughts about is this capital intensity likely to continue into 2020?

And then any comments on M&A opportunities?

I think you talked about tuck-ins and maybe some international opportunities over time, but we haven't seen you do much for a while.

And any color on what you might be interested in there would be great.

Sure.

With respect to how much capital, we haven't given out any of that information.

What I will tell you is it is fully contemplated in our 2019 capital outlook that we provided and it's part of the growth initiatives that we talked about over in previous earnings calls.

The completion is the end of 2021, but the majority of that long delay has to do with Europe.

In North America, I don't have the exact date in front of me, but it's not a network where you've got to wait until everything's turned up.

We prioritize the routes based on the demand from our customers.

We will activate those routes.

We're in the process of activating them.

We've installed the fiber.

We'll continue to do that based on the prioritization that our customers want.

So we're really pleased with our ability to roll this out very quickly.

If you have a network that's direct buried into the Earth, it costs you an enormous amount to open a new trench.

It costs you an enormous amount of time to get all the rights of way and all of that.

And what we do is we route and rope the conduits.

We pull the fiber directly into the conduit.

It's very simple, very straightforward and very cheap compared to the alternatives.

So we're really pleased to use our very extensive conduit network to take advantage of that.

With respect to M&A, we don't really talk about M&A before we do something.

We will continue to be active and looking.

We're an acquisitive company.

We'll make sure that anything we do is accretive to the business and free cash flow basis and a functionality basis, and so we'll continue to look at that.

Right now, our real effort is transforming CenturyLink and looking at the way that we interact with our customers and creating an environment where we can do seamless things.

I mentioned in the prepared remarks our Dynamic Connections.

Dynamic Connections for Enterprise customers allow them to establish connectivity with us and then use that connectivity by typing in a few key strokes to either increase the speed or redirect it from one cloud service provider to another or one of their data centers to another and really give them the flexibility to use that in a digital way.

The next step of that obviously is to create a connection between their systems and our systems where their AI tells us to automatically upgrade that capacity or do something.

And so that's really the effort of ours over the next couple of years.

And so there's some tuck-in type ideas that might make sense to go with that, but we don't talk about any specifics until we do something.

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

I guess 2, first on the consumer side, I recognize you don't want to talk about strategic options.

Can you tell us if you've ruled anything out at this point?

Or things that you may have talked about ruling out back in May, if those possibly come back to the fore.

And then sticking with the fiber build, can you expand on your plans from here around Metro in long distance fiber, and how that fiber build may have impacted any dark fiber bookings and then how we should think about that going forward?

Sure.

I got distracted.

On the consumer, first of all, I don't know anything that we might have said in May.

So if there's something specifically I said, remind me of it.

But no, to answer your question, and I won't take any more questions on the consumer process just because it's still early in the process and I don't have anything, any real update.

But we haven't ruled anything out.

We're open-minded.

And we think that it's important for us to look at all options and including continuing to own and operate it.

And so we're open to all of the various options and really just trying to understand the best way to maximize free cash flow per share for our shareholders over the long time.

And then the second question was on the overbuild and the impact that has on dark fiber.

Is that right?

Correct.

I think it has great impact on dark fiber.

We are quietly a very large dark fiber sales company.

We don't emphasize it that much externally but we love it.

We have great customers.

This ultra-low-loss fiber is important to our dark fiber customers, in some of our dark fiber customers, not all of them, the hyperscalers I mentioned, large enterprises that have huge bandwidth requirements and then again, some of our dark fiber customers that are trying to serve their own needs internally.

And so we think it'll be -- we think it's a real opportunity for us.

Our next question is from the line of Brett Feldman with Goldman Sachs.

And just to follow up on something you were discussing during your prepared remarks.

Jeff, you talked about low-calorie revenues and how you've been weaning the company off of products and services that weren't helpful to the bottom line for a while now.

I still think your current period top line results are being compared against prior periods where maybe there was more of that in the mix.

So I guess I'm just trying to understand, do you think you've hit a lot of the significant opportunities to maybe get the mix from a profitability standpoint where you want to be so that maybe we'll have better visibility into sort of the true organic trajectory of the business?

Or do you still have more of this you want to do?

And then just over all, I'll be interested in hearing your thoughts on the Enterprise and IGAM demand environment.

I feel like we've gotten mixed messages from some of your large peers about what the market environment is like.

And I'm curious to the extent to which the demand backdrop is influencing your view on where the second half of the year is going to shape out.

Sure.

I'll answer the low-calorie and then let Neel add any specifics he wants to do.

I think it's getting behind us.

There's not any super, major low-calorie revenue that we're targeting today.

We -- in the Consumer business, we said we're going to deemphasize the Prism linear TV and we've deemphasized contracts and gotten out of contracts that we thought were underwater.

We stopped selling CPE.

A lot of that is still in the year-over-year comparisons, Brett, so that makes it kind of difficult.

But if you start looking at the sequential comparisons, it will be in there less and less.

So I think that going forward, we'll stop talking about that even though there are going to be some here and there that affect us.

The other thing that we're trying to do though is with some of this low-calorie revenue, we're trying to increase the profitability by moving things off-net to on-net.

And then we will do rate hikes.

And if we can't make it profitable then -- with rate hikes, then the customer may leave us.

But those are small things around the edges.

I think it's starting to fall out of the year-over-year comparisons, but it's going to be faster falling out of the sequential comparisons.

Yes.

Just to add a couple, it really is around the edges, Brett.

I think if you look in the other -- in the product breakdown for other, for example, in consumer, that's where a lot of the Prism revenue is.

So sequentially, it was down $6 million, $7 million, so that will continue.

If you look at our IT and Managed Services products, that's where we have some of the legacy hosting, if you will, and some of that will continue to attrit.

So it really is around the edges and that was part of the reason why we talked about Enterprise and IGAM growth.

We said second half will be higher than first half because first half is relatively clean compared to last year where we were working through a lot of that.

And with respect to IGAM and Enterprise, the demand environment that we see, look, we love this business.

We think there's great demand out there for the types of products and services that we sell and that the demand is growing for those types of products and services.

Now some -- there are some products that are going to decline as customers transition to us and transition to the newer products and services.

And we think that's a good opportunity to go out and take share from other people and help those customers make that transition.

So we think market is good for us.

We think we have great assets and great network capabilities.

We want to continue to expand that and augment it, adding 4,500 buildings in the first quarter gets us to more customers; adding 5,000 buildings in the second quarter gets us to more customers, gives us a better footprint to deliver those services on.

We know when we sell on-net, we do a better job for the customer.

We make more money.

It's all around a good thing.

And so we look at the market, and I said this for a long time, it's whether it's the market or the economy, we look at it and say, it's up to us to execute.

If CenturyLink executes in a way that we can, with the network assets that we have, with the capabilities and the products and services and the Managed Services and all of those things, if we invest appropriately for growth continuing to augment our capabilities, we win.

And so I don't really have any great comments on the market other than it's good for our products and services.

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

Walk us through the current pricing in wholesale in general.

And then I know you said you're not going to really touch so much on M&A, but can you --are there other assets possibly that you might want to divest to try and help with leverage, maybe data centers or CDN business, something like that?

So I'll take the second question, and Neel can talk about the pricing.

As I said previously in the answer and in the prepared remarks, we look at everything.

And we are not opposed to evaluating each individual business that we have, each individual line of business, and we will continue to do those types of things.

And there's nothing I want to call out but there are some things that we're actively looking at and have been since the -- over the past several months, and we'll continue to do that.

One of the things you've got to do is you've got to have a willing buyer and a willing seller.

And we're in the process of figuring out, first of all, if we're a willing seller and secondly, if there's a willing buyer out there.

Now what we do know is that regardless of the particular product or the particular line of business, if we focus on growing free cash flow, then we have options to whether we want to keep it or not keep it.

And so every part of our company, we are looking at how do we get it to contribute free cash flow.

And if we don't think we can, for example, the Prism TV, if we don't think we can get it to contribute the level of free cash flow that we want, we'll stop doing it.

On the pricing side, Frank, I would say overall, we -- in the wholesale, I think your question was specific to wholesale, we see rational behavior and we follow the market fairly closely for access.

Particularly, we see areas where others are raising prices, so we try to stay competitive.

But if there's an opportunity to raise prices, we raise.

If there are multiple competitors and we need to lower prices, we do.

But overall we think the return profile, given the current pricing, looks very good.

And part of our business is a wholesale voice business in wholesale and we manage that as a trading desk on an everyday basis, so that's all based on margins.

So we really don't care about the top line there.

We have guardrails around what margins we want to make on a per minute basis, and we manage that like a trading desk.

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

First, the building additions you've noted in the past 2 quarters have been pretty substantial.

Can you talk about what share those adds are primarily driven by efforts to move off-net traffic on-net for existing customers versus building that you've otherwise targeted?

And shall we think of this pace as what you can sustain for the next several quarters?

First of all, thank you for noticing that they're substantial because we're working hard at it.

And I will tell you that we prioritize buildings for off-net to on-net.

We prioritize them for free cash flow.

I hate to keep using the same phrase, but it actually offer -- it's the driving factor behind our company.

And so off-net to on-net is a guarantee and we know it.

Existing sales is another way that we prioritize them.

And there's not quite -- not all that many of it we do a build it and they will come type approach.

That's very rare.

So the addressable market are opportunity for us to remain at this pace.

And I can't predict how long, but it's going to be driven by as long as we're finding buildings that we can profitably build into that make us money, we'll continue to do that.

And it's not a limiting factor of our ability to turn those buildings up.

It's -- the limiting factor over the long-term will be what types of returns do we get for each of those buildings.

And right now, we're very pleased with it.

So I can't give you a prediction of how long it will last, what I will tell you is that when we look at our capital outlook, we factor in these building adds as well.

So as you look at our capital outlook and you think about it for the year, whether it's long-haul, ultra-low-loss fiber, whether it's edge computing expansions or building adds, that's factored into our capital outlook.

Okay.

Got it.

And then, Jeff, you noted in your prepared remarks your focus on customer satisfaction.

Kind of along those lines, can you share any details regarding what churn trends have been like in the business?

Yes.

So qualitatively, the churn has been pretty good.

Especially a year after an acquisition, we're pretty pleased with the churn.

And that tells us we didn't do anything wrong in working with our customers.

It doesn't say we necessarily did everything right, but it tells you we didn't do anything wrong.

And if you look at our churn across the business, broadband subs and consumer, although there's seasonality in the second quarter typically, if you look at year-over-year second quarter, we're pretty pleased with our overall churn.

Enterprise, wholesale -- wholesale, we've described for a long time to be flat to slightly down, and it's going to continue at the trends that it is.

It's just the nature of that business.

But we manage it, again, we manage it pretty heavily for margin and for contribution.

Our next question is from the line of Tim Horan with Oppenheimer.

Do you think this is kind of peak revenue decline year-over-year at this point?

Or can you give a little bit more color?

I know you gave 2 line items on revenue declines for the second half of the year.

And maybe obviously, there's a lot of moving parts and you're throwing a lot of money at putting infrastructure in place that leverages a lot of your existing infrastructure, which is a really, really smart move, like deemphasizing, obviously, a lot of legacy products that we're talking about.

Any color on when you can get to breakeven on revenues?

And so I think, Tim, I think the year-over-year gets complicated because of all the noise last year.

And then if you think back to fourth quarter of last year, we had the noise but then we also add strength and a lot of nonrecurring revenue items that we called out in our fourth quarter earnings call.

But in general I would say if I look at the first half of this year, compare that to first half of last year, more than 1/3 of the revenue decline is driven by a lot of actions we took, whether it's Prism, unprofitable GAM contract, unprofitable government contract, deemphasizing CPE, et cetera.

So like Jeff mentioned earlier, we don't have a lot more of that to go.

So going forward, the comparisons are going to get more cleaner.

And in terms of trajectory, I think, like we said we feel good about IGAM and Enterprise.

SMB, the challenge we have is it still has a fair amount of legacy voice.

Our sales actually grew sequentially, second -- first quarter -- second quarter over first quarter.

But we need a lot more improvement, which we think we have the addressable market and we're focused on growing sales, so again, at some point, offset some of the legacy declines.

And I am very focused, and Lisa Miller who runs that business unit is very focused on selling to small and medium business, in lit buildings outside the legacy CenturyLink footprint.

Level 3 never focus there because it's not that type of customer we focus on.

CenturyLink never focused there because that's not the type of -- we didn't have the network to sell to those customers.

And so neither side of the previous companies focused on those, that's a great opportunity for us.

We have to stay focused and we have to really drive our opportunities outside of the region for those customers.

And the one other comment I would add is on the consumer side, if you look at our broadband business, we're investing in that business.

We're focused on the competitive asset.

Broadband revenues grew year-over-year this quarter.

It grew year-over-year last quarter, and I think it grew year-over-year all 4 quarters of last year.

And there, we're going to continue to focus on that business and also focus on expanding the margin for those business, that business like Jeff mentioned in terms of how we interact with customers with self-install and digital interaction, et cetera.

So maybe just one more question, sorry.

How about on the free cash flow front?

Do you think the next couple of years -- obviously a lot of moving parts in the business model, but do you think free cash flow can be relatively stable at this run rate over the next few years?

Can it grow?

Or should we expect some declines with all the moving parts?

So look, I think we'll have more to say about next year's free cash flow when we get to -- at that point.

But directionally, our objective is to continue to grow EBITDA, and we feel good about that.

From a capital standpoint, like Jeff mentioned, a lot of these investments that we're making are within the existing envelope.

So if you look at our current capital guidance, I think it's factored in there.

In fact, a lot of the fiber deployment spending was last year when we spent only 3.2 -- $2 billion so we're going through a massive effort in terms of reorienting in terms of where we spend capital.

So we're not spending capital in areas that we don't think we are getting a return and really focused on long life investment.

So I think that's all factored into our capital.

And if you think about net cash interest with our deleveraging efforts and given the interest rate environment, that should improve, so just to give you a flavor for where free cash flow is headed.

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

I guess just a couple.

Neel, on the mathematics of getting a better second half out of Enterprise and IGAM, especially for Enterprise, it suggests a pretty healthy kind of U-turn in the business in at least the third quarter if not the fourth.

And my guess is that you mentioned a few things that gave you conviction on there.

You mentioned the sales funnel in particular.

I think both of you mentioned it.

But I imagine mid-third quarter now, we've got to be on the install part of that kind of process.

And I was wondering if you can kind of elaborate a little bit if the conviction that you're having on the second half being better than the first half is coming from that installation process and the fact that things are actually happening on the ground, especially if there was that $15 million onetime on international.

The second question was on the math of the transformation program.

The quarter-to-quarter change from 1Q to 2Q would suggest we're on track to maybe be at a $600 million run rate by the end of the year.

And I was wondering if you can kind of elaborate on whether that's realistic, and if it is, kind of the pieces, parts that will get you there.

Sure, David.

So on Enterprise, you're right.

A big part of that is installs because like I mentioned, I think a big sales ramp came up -- came in, in March and then second quarter was a good quarter of sales for Enterprise.

But given the nature of customers in that segment, some of these deals are large deals, 700-node networks, so it takes a while to get those installs.

And so yes, we need to execute on all the installs.

And then there is the sales funnel which we feel good about, but that will impact more of fourth quarter.

So the third quarter impact improvement in revenue will largely be driven by installs, and similar on the IGAM front as well.

And so yes, the leading indicators we're positive about.

On the transformation front, we were able to accelerate and -- but I think for the second half of the year, I would say if you look at our overall guidance of $800 million to $1 billion over 3 years with 10 more quarters to go, I would think about it as $50 million to $70 million per quarter is kind of the baseline.

But at the end of the day, if we can accelerate, we will.

But we're not banking on accelerating.

Our next question is from the line of Mike McCormack with Guggenheim.

Jeff, maybe a quick comment just on the overall fiber capacity.

Obviously a lot of us have moved through the early 2000s with the fiber growth that occurred back then and the new technologies coming to market.

But how do you frame the current sort of capacity or situation with respect to the domestic fiber networks?

And then secondly for Neel, on the leverage side, obviously you still have a lot of EBITDA coming out of legacy revenue streams.

Just trying to get a sense for how you sort of bifurcate those streams and whether or not it's more acceptable to have maybe a higher threshold of leverage, some of the newer stuff and perhaps a little bit lower on the legacy declining revenue streams.

Any thoughts on that would be great.

Yes.

So on the -- I've not had a fiber glut question in years, so Mike, thanks for teeing that one up.

If you think back to 2000, 2002 when there was a glut of fiber, it wasn't a glut of fiber.

It was a glut of fiber providers.

And so we had Level 3 and Qwest and WilTel and Broadwing and IXC and all these companies going out and building the same assets between the same locations, and then they started getting into trouble.

And when you get into trouble, the next dollar of revenue leads to another dollar of revenue so you get irrational pricing.

We don't have that today.

We don't have a glut of fiber.

Obviously, we wouldn't be augmenting fiber if there was a glut in the industry.

We don't have a glut of competitors out there.

There are a lot of good fiber competitors, a lot of good companies, but they're -- but for the most part, it's a rational market and we're building fiber where we need it.

I don't worry about a fiber glut.

I don't worry about some irrational player selling fiber for ridiculous prices.

It's a fairly rational market.

It's a competitive market, but it's a fairly rational one.

So I'm pretty pleased with where we are.

I don't worry about it that much.

So Mike, really, those are painful days.

They were painful days for all of us.

So Mike, I'll take a shot at your question.

I'm not sure I completely understand it, but come back if I don't address it.

So the way we think about it is we are, first of all, we're deleveraging.

So we're -- we feel good about that plan.

In terms of all of our investments, they're going big chunk of that, if you hear our commentary and what we're focused on, is really on long-life asset primarily fiber with -- supports different technologies.

And what we're working on is really transitioning from legacy EBITDA to newer services on that, right?

So -- and that will be an ongoing process.

And as an industry, for some of us that had been in this industry for a really long time, we've gone through that transition several times.

And so we're managing that at an aggregate level in terms of what leverage makes sense.

And we don't really think about it in the piece parts, if that makes any sense.

Yes.

Neel, I guess I was just sort of thinking about as the transition occurs, not so much obviously this year, but longer-term leverage ratio would have changed that dynamic for you.

Obviously, legacy Level 3 was a bit more highly levered.

Yes.

Yes.

But for the near term, I think the range, we feel good with the 2.75 and -- to 3.25, we feel very comfortable with that.

And if we get to a different dynamic, then we'll give it some more thought.

Before we finish -- I think that was the last question, so before we finish the call, I'd like to wrap up with a few key points.

We remain focused on growing adjusted EBITDA and expanding margins.

We delivered on those objectives again this quarter while also focusing on improving the customer and employee experiences.

With a solid quarter of sales and a strong funnel, we're seeing signs of improving revenue performance and expect a better second half of the year for IGAM and Enterprise.

We continue to evaluate strategic options to create value with our asset portfolio.

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

We're excited about the investments we're making to continue to enhance and expand our fiber network and to solve our customers' evolving networking needs, like edge computing.

We continue to make progress toward our deleveraging objectives and expect to meet our leverage target within our 3-year time frame.

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

Every action we take and every option we review is in the context of that metric.

Thank you all for joining today's call and for your continued support of CenturyLink.

France, that concludes the call.

Thank you.

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

This does conclude the conference call.

We ask that you all please disconnect your lines.

Have a great day, everyone.