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EarthLink, Inc. (NASDAQ:ELNK)

Q1 2014 Earnings Conference Call

May 06, 2014, 08:30 AM ET

Executives

Joseph F. Eazor - CEO and President

Bradley A. Ferguson - EVP and CFO

Louis M. Alterman - SVP of Finance and Treasurer

Analysts

Michael Crawford - B. Riley Caris

Barry Sine - Drexel Hamilton

Donna Jaegers - D.A. Davidson & Co.

Lance Vitanza - CRT Capital Group LLC

Arun Seshadri - Credit Suisse AG

Anthony Klarman - Deutsche Bank AG

Operator

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the EarthLink's First Quarter 2014 Earnings Call. All lines are placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

I will now turn the conference over to Mr. Louis Alterman, Senior Vice President of Finance and Treasurer for EarthLink. Please go ahead, sir.

Louis M. Alterman

Thanks, and welcome to our call. During today's call, we will refer to earnings slides that are available for you to view in the Investor Relations section of our website at earthlink.net. Following our comments, there will be an opportunity for questions.

Before we continue, I would like to point out that certain statements contained in this earnings release and on this conference call are forward-looking statements, rather than historical facts. They are subject to risks and uncertainties that could cause actual results to differ materially from those described.

With respect to such forward-looking statements, the company seeks the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors, including competitive developments and risk factors listed in the company's SEC reports and public releases. Those lists are intended to identify certain principal factors that could cause actual results to differ materially from those described in the forward-looking statements, but are not intended to represent a complete list of all risks and uncertainties inherent to the company's business.

In an effort to provide useful information to investors, our comments today also include non-GAAP financial measures. For details on these measures, including why we use them and a reconciliation to the most comparable GAAP measures, please refer to our earnings release and the Form 8-K that has been furnished to the SEC, both of which are available on our website at earthlink.net.

After Joe's opening comments, Brad Ferguson, our Chief Financial Officer, will discuss the quarter's financial results.

Now I'd like to hand things over to Joe Eazor, our President and CEO.

Joseph F. Eazor

Thank you, Louis. Good morning to everyone joining us on the call. Four months into the job, I continue to be very excited to be part of EarthLink and I'm even more bullish on our opportunities than I was the day I joined.

I'll start this morning by saying that I'm generally pleased with the financial results of the quarter. We focused on driving operating improvements in a number of areas, which are starting to show up in our results.

Though revenue is not yet where I wanted it to be, we took some good steps to lock down more of the base to protect our future revenue. We have a team focused on improving cost of revenue and we've made good progress and successfully begun to lower our costs.

We initiated an intense focus on managing CapEx and cash flow and our pleased with our results in the quarter. Brad will take you through the details of all this in a couple of minutes.

So over the last few months, I've undertaken a thorough strategic, operational and financial review of the company. To me it's clear that we have tremendous opportunity to create significant value and we have a lot of work to do to get there to be the great company that we can be.

At the highest level, we must have a focused strategy that's targeted the market with the market opportunities aligned with where we have true competitive advantages. We must deliver maximum value to our customers and our employees. We must simplify our operations to become operationally excellent and we must look for ways to optimize our portfolio of products and businesses.

To be clear, this means that we will stop doing certain things recognizing that we cannot be everything to everybody. I will speak to each of these in more detail beginning on Page 2. Let me start with our strategic focus and intent.

After conducting a thorough review of our products in markets and then spending significant time with our customers, including a number of CIOs from our largest customers, it is clear that we have some industry-leading products capabilities. We are a recognized leader in managed network services.

At our core we are outstanding at optimizing and managing networks across multiple locations on a national or regional basis. This not only includes momentum and success with the who's who list of retail brands, it also includes other industries where our customers have multiple location and are dependent on the success of the network, like retail banking, retail healthcare, multi-location professional services and so on.

This is a growing and healthy market. Even though we have good momentum, we barely scratched the surface with an average share in existing customers of less than 10% and numerous other potential customers that can benefit from our services.

Additionally, we have a number of strong cloud services. They're relevant and naturally fit with our managed network services. These include Hosted Voice over IP, network and other data analytics, disaster recovery, security at hosted relevant applications. We're in the early stages of pursuing these areas that have tremendous opportunities for growth. Therefore, our strategy is to focus on and invest in managed network and relevant cloud services as a primary growth platform going forward.

This will include industry-leading customer value propositions and roadmaps on how to best leverage emerging technologies like SDN and network virtualization. Additionally, we need to strengthen our professional services to be able to deliver more value to our customers as we pull through our managed services products. Lastly, we will increase the emphasis on selling transport business on our 30,000 route mile fiber network.

The implication of this focus is that we need to narrow and optimize our efforts in other areas. For example, our portfolio of products and investment in cloud and IT services have gone beyond products that are core to our network. This adds complexity to our system and diffuses the attention that ourselves and operating teams can give to the products and customers that are truly relevant to our two core network capabilities. So we will be realigning and rightsizing these investments to those areas that are most relevant to manage network services and limiting the rest.

Also, through our CLEC acquisitions we now have tens of thousands of small customers with few employees that operate their businesses out of a single location. My assessment is that versus the cable companies, we have inferior economics for these customers and the investment required to build competitive products and proper sales efforts would make it hard to generate a return.

As of cloud in IT services we have invested operating expense to attack the small business customer side. By continuing these efforts, we'll distract from our core strategy going forward. Therefore, we will be rationalizing our efforts here, taking a more marketing led approach versus direct or insight sales led approach to this market making this part of the business more stable and predictable and working to make our cost structure more variable. That's likely done with our consumer business.

This strategy will also enable us to improve our operational transformation efforts which I outlined on Page 3. In addition to rightsizing our efforts in cloud and IT services and a small business customer set, we must first improve our products and marketing. This includes rationalizing our product catalog, simplifying from over 10,000 product codes that came together through acquisition to start (indiscernible), building a world-class product management and marketing capability to drive end-to-end management and investment in our growth products, developing from a product suite and strategic alliances for our target market and to drive these improvements we just hired two outstanding industry executives within the last month; Rick Froehlich who has joined to lead our Products Group and Alexandra Gobbi who has joined as our new Head of Corporate Marketing and Communications.

Second, we must continue to transform our go-to-market and customer experience efforts. This includes optimizing our routes to market and coverage models by customer segment, better leveraging our channel partners, reengineering our quote-to-cash processes, enhancing our customer value propositions and the overall customer experience and establishing a dedicated cross-company churn reduction and management effort.

Third, we need to complete our IT systems consolidation work. We are seeing good progress here but there are some key systems to successfully rollout in the next three quarters, including our quoting system and approved product catalog, common billing system for new customers and improve data warehouse. And finally, we must drive operational excellence through an enhanced organization and operating model.

In the last two weeks, we have moved to a simplified organization that is functionally aligned. This may sound like a smaller thing but it is critically important to get the right people into the right roles to establish clear responsibilities and accountabilities and to grow our performance management culture.

Before I hand it over to Brad, I would like to touch on the last part of our strategy which is about optimizing our portfolio of products. As Page 4 shows we have effectively five different areas of focus today. They are interrelated and that they share certain system and network elements. Each product set has its own economics, growth prospects and comparative dynamics.

As I mentioned, our growth focus will primarily be directed efforts in the two boxes to the far right, that is network services and relevant cloud services. We will bring these two closer together and operate them as our growth platform. For all these areas, we've identified what needs to be done and have made some key strategic decisions to set out path. We are pointing our people in a clear direction and beginning the early stages of detailed planning and execution of this direction.

As this process progresses, I will continue to provide you guys regular updates. As we do this, we will be looking for ways to optimize the rest of the portfolio and will evaluate the portfolio alternatives that would further simplify our business and/or accelerate our path to success going forward. In the meantime, as you can tell, I'm focused on cash and this year we've changed our compensation metrics to include a larger emphasis on cash flow. It is working and we aren't going to let up on it.

Based on my confidence and our future cash flow profile and the levers we have yet to pull, the Board, the management team and I are fully committed to maintaining the dividend. I will be happy to talk more about our strategic thinking and our transformation plan in Q&A, but for now I'll turn it over to Brad to dive into our financial results and guidance. Brad?

Bradley A. Ferguson

Thanks, Joe. I'll begin Page 5 with an overview of the financial results for the quarter. For the first quarter we reported total revenue of $297 million, a decrease of 1.5% from the fourth quarter of 2013 and a decrease of 6.1% from the first quarter of 2013.

In the first quarter of 2014, we benefited for some pricing actions on targeted products. We take these pricing actions from time-to-time but the timing is lumpy and not smoothly spread throughout the year. Revenue on our business services segment declined less than 1% from the prior quarter.

Gross margin was $151 million for the quarter, down only $200,000 from the fourth quarter of 2013. Across our business we are aggressively managing our costs including more resources dedicated to auditing the thousands of lines of vendor invoices we process each month in cost of revenue. In the first quarter, our success in this area favorably impacted our results by a few million dollars. In part to these efforts, our gross margin dollars and gross margin percentage for business services expanded in the period.

Adjusted EBITDA for the quarter was $50 million, flat compared to the fourth quarter of 2013. Recall that during the fourth quarter of 2013, we recorded about $4 million of settlements that favorably impacted adjusted EBITDA for the period. The positive adjusted EBITDA result this quarter was driven by the favorable impact of price increases and cost structure improvements discussed earlier.

Net loss for the first quarter was $26 million or $0.26 per share, which include the fixed asset impairment of $5.3 million. As part of our revised integration plan, we determined a more cost effective way to achieve some operational functionality in our OSS platform. As a result, we wrote off the associated capitalized costs that had been recorded on our balance sheet and we'll avoid some future cash outlays as a result. Adjusting the net loss for this charge, the quarterly loss was $21 million or $0.21 per share.

Our focus on cash flow yielded a significant reduction in capital expenditures. We spent $23 million in the first quarter which is 31% less than the fourth quarter of 2013 and 45% less than our year-ago quarter. As a result, we increased our unlevered free cash flow to $27 million in the first quarter from $16 million in the fourth quarter of 2013. I have more to say about capital expenditures in a little bit when we discuss our guidance.

Our revenue components are shown in more detail on Page 6. The consumer business continues to perform as expected. Consumer revenue declines continue to attenuate decreasing 12% from the year-ago quarter. We expect this business to continue to flatten over time.

Moving to our CLEC business offerings, we generated $151 million in revenue from these products during the fourth quarter, down from $154 million in the prior quarter. This portion of our business contributed 51% of our total revenue, down from 54% in the first quarter of 2013.

Our carrier and transport revenue was flat from the Q4 2013 producing $36 million in the first quarter. Our managed network and cloud services produced $47 million in revenue in the first quarter, a growth of 28% over the year-ago quarter. Our overall growth product portfolio expanded to a $333 million run rate during the first quarter.

Our revenue trajectory on Page 7 illustrates continued improvement in our overall revenue performance. The figures on the right side of the page show revenue that has been normalized for dispute settlements that can cause noise in the numbers in any given quarter. As mentioned earlier, the benefit to our revenue trajectory from customer price increases will be more pronounced early in the year.

On Page 8, we discuss churn which was up from the fourth quarter due to seasonality and the price increases we implemented early in the quarter, and continued pressure on the low-end customers. As indicated by our revenue results during Q1, the price increases contributed more value than was lost to a small uptick in churn. As we discussed in the past, we are focusing a lot on churn.

This quarter we increased our efforts to get more of the base on a contract. The result was that the mix of our sales activity shifted so that we had lower new logo bookings but the volume of customer re-terms doubled and the total bookings including both new logos and re-terms was the highest level we've seen since we began tracking that metric five quarters ago.

Securing future revenue by extending contracts with existing customers is an efficient way to maintain value on our business and should drive lower future period churn. Our consumer business continues to perform well as expected. We typically experienced higher churn in the first quarter but Q1 churn was only 10 basis points above all-time historical lows, as shown at the bottom of the page and down 10 basis points from one year earlier.

Turning now to a discussion of cash flow on Page 9. As I mentioned earlier, we have been able to squeeze more efficiently out of our capital expenditure dollars which helped us to deliver $27 million of unlevered cash flow in the quarter. We also paid dividends in the first quarter of $6 million. Integration on restructuring costs for the quarter were $9 million which included expenses related to the CEO change.

I'll note here that we repurchased about 400,000 shares after the end of the quarter. This activity will show up in our second quarter results. The chart at the bottom left of the page shows the capital spending in the first quarter is down from the run rate of late 2013, down significantly from the elevated levels in late 2012 and early 2013.

Looking at the balance sheet on Page 10. We ended the quarter with $109 million in cash and we have $600 million in gross debt outstanding with maturity dates in 2019 and 2020. We still have access to $135 million on our revolving credit facility which remains undrawn.

On Page 11 we provide our updated business outlook. We're not adjusting our previous guidance on revenue, adjusted EBITDA and net loss, expecting full year results for revenue between $1.16 billion and $1.18 billion, adjusted EBITDA on the range of $180 million to $195 million and net loss in the range of $85 million to $95 million. We're lowering our CapEx guidance by $10 million to a range of $115 million to $125 million and expect unlevered free cash flow to increase accordingly.

With that, operator, let's open up the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first audio question comes from the line of Mike Crawford with B. Riley & Company.

Michael Crawford - B. Riley Caris

Thank you very much. I understand that you took some pricing actions that benefited the company in Q1. Can you identify a couple of those to give us a sense of what you did?

Bradley A. Ferguson

Yes. So these are things that we do time-to-time. Again, I said it was kind of lumpy throughout the year but we don't really disclose the amount but certainly help the run rate. That's probably a couple million dollars each month that just kinds of rolls through, but again really normal actions and really the reason we call it out is just because it adjusts some of the trends and we won't see that – we'll see the decline show up more in Q2, but really that's (indiscernible).

Michael Crawford - B. Riley Caris

Okay. Thank you. And then on the services that are deemed non-core going forward sounds to me like you're talking about things like CenterBeam that you acquired for $22 million last year and IT solutions center with the help desk and does that mean that you would like to divest these and you might see a possible influx of cash at some point this year from these businesses?

Joseph F. Eazor

Mike, this is Joe. We're still working through all the details on each one of the services that will be noncore and the best option for – the way to exit like you mention or manage for cash. So I won't comment specifically on what exact services they are, Mike, but generally speaking you're right on with the concept of if it's noncore we'll be considering alternatives for it either as looking for creative arrangement externally for potential buyers or we'll harvest it for cash. So you're point is right on.

Michael Crawford - B. Riley Caris

Okay. Thank you. And the last question relates to CapEx, so it was 23 million in the quarter. You did bring the range down 10 million for the year but that's still implies actually significant uptick for the remainder of the year versus the rate that you invested in Q1. I mean is this a business that you think you can maintain a similar revenue trajectory as EarthLink has been on and instead of doing like 110 million or 115 million or 120 million of CapEx to do it with like maybe less CPE and maybe only 80 million of CapEx and really increase the free cash flow that the business can generate?

Joseph F. Eazor

So, Mike, on the last part of your question I'll kind of address that and let Brad talk about the first part. On the last part of your question, I think there are opportunities to us to manage cash flow and remain on or even improve our revenue trajectory going forward – excuse me, our CapEx, optimize our CapEx. Like there are – just the emphasis on it. Part of our bonus line LTI is based on cash flow in a large part now. So there was a lot more scrutiny and attention now on cash flow including optimizing how we spend our CapEx. So I don't see an adverse impact to our ability to stay on the revenue trajectory line or even improve it based on our CapEx.

Bradley A. Ferguson

Just for the rest of the year we hope to scrub the dollars and do a little better, but there are some known projects that some of that creates some lumpiness but there's a couple of good projects in the back half of the year that we know that should take it up a little higher than what we saw in Q1.

Michael Crawford - B. Riley Caris

Okay. Thank you very much.

Joseph F. Eazor

Thanks, Mike.

Operator

Your next question comes from the line of Barry Sine with Drexel Hamilton.

Barry Sine - Drexel Hamilton

Good morning, folks. I wanted to zero in on Slide #3 and better understand the financial and timing impacts of the operational transformation steps, and there's a couple of items I wanted to zero in on. The first one you talk about improving the quote-to-cash process. I'm assuming that means shortening the timeline. Can you talk about what is the current backlog? What does it look like? What is that current timeline to get from quote-to-cash? How much can you shorten that? And when are we likely to see that improvement in place with the numbers?

Joseph F. Eazor

Yes, so Barry the short answer to your question is when we assembled the companies and acquisition, we have multiple systems that we're going through a consolidation effort line. The process got more complex to quote and then process and install orders. And we saw some slippage in terms of the cycle time it took to get that done and then an uptick here and there on cancellations and downtick on customer experience. So a lot of activity going on. We're already seeing signs of progress in our service delivery activity and our systems as they roll out are continuing to improve that process. So, there will be a shorten cycle time with better customer experience and obviously there will be some operational efficiencies to get out of that. But at this time I don't have numbers to project for you on that specific item. It's baked into our guidance for this year. A lot of that activity will bear fruition for us I think in '15 because there's still a fair bit of heavy-lifting this year. But it's already baked into our guidance, Barry.

Barry Sine - Drexel Hamilton

Okay, great. And then the next section you talk about roll-outs of quoting, order management, billing systems. I'm trying to understand a financial impact of that? I'm assuming we'll see the CapEx impact of that in 2014 or maybe give us a sense of how much of the CapEx guidance is internal systems such as these? And then once that's all said and done, what type of an impact would we see financially? I'm assuming we might see some type of benefit in the EBITDA margin?

Bradley A. Ferguson

Yes. So kind of back to Joe's earlier point, I mean in our guidance certainly this is factored in for this year and in CapEx. We talked about the mix of growth versus projects and the growth making up about two-thirds of our CapEx, really the projects making up the additional amounts. And certainly all these things will help take topside of the business, get more efficient over time. So really you see most of the cost to implement and execute of that showing up in '14 and then we need to get the benefits in the future years. But certainly the impact of '14 is factored into our guidance and we'll give you more insights over time on the future impacts as we talk about 2015.

Barry Sine - Drexel Hamilton

Okay. And then I guess my last question is for Joe and kind of along the same lines. I think you indicated in your introductory comments that you're still in the planning stages on executing some of these changes. Could you give us a sense of what kind of a timeline you're looking at? When do you expect to be done with the planning and start implementing these? And then what type of a timeline do you think it will take to fully mold EarthLink into your image? Are we talking about a two or three or four year process or is it something you think you can get done by sometime in 2015, the changes that you're talking about will be in place?

Joseph F. Eazor

With respect to the – I think you said building EarthLink in my image and yet that sounds kind of funny to me is I think EarthLink can be better than me, but let me put it this way. There's a fair bit of work to get done this year and a lot of the blocking and tackling just to your earlier question on IT systems I guess done this year and we start to operate more effectively with one set of systems and one set of processes and it really starts to make a material impact in our ability to sell quote, install and then serve our customers. So this year is a year for hard work. I think all the reflection of the work that we got to get done this year is in our guidance, like Brad said. And my expectation is that we'll see the benefit of this in the next year. And we're already in implementation on most of these things to your first point. I think the second point is some of the strategic changes that we've articulated here today we're just starting the detailed planning and implementation activities on, so like how we'll manage the small customer business set and how we'll narrow our focus and invest in relevant cloud services. So that activity will take a few months to really get the detail planning and execution started on, but again a lot of the work can get done this year as we'll see benefits I think going into '15 and certainly '16. This is not a nine-month turnaround effort. As a matter of fact just the blocking and tackling and so forth with a lot of them done this year a bit; on the strategic side investing in managed network services and the relevant cloud services. It's a longer term horizon, but the next few years will be really exciting for us.

Barry Sine - Drexel Hamilton

Okay, great. Thank you.

Operator

Your next question comes from the line of Donna Jaegers of D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co.

Hi, guys. Joe, you have fairly valuable fiber assets in the Southeast. What are they on the books for roughly? And what – you talked in your prepared remarks about trying to add more revenues onto your network. What else could you do? I mean you don't really – I'm assuming you don't use too much of that fiber really for your own use. Is there more optionality to that fiber where you could perhaps sell it to someone who is willing to pay nine, ten times EBITDA for it and then lease it back?

Joseph F. Eazor

Donna, I'll take the first part and let Brad follow-up with the book value. The fiber assets are valuable assets for us. We see and deliver on that whenever possible. Obviously when you're doing nationwide retail networks, not all of it is going to be on that. So we think there's an opportunity to sell more transport capability and to take better – to realize there are more value of that asset just in a sales and a revenue perspective. Having said that we're continuing to look at strategic alternatives and we'll do what's best in the interest – the best interest of value creation and we'll take a look at whether it creates more value in our hands or we get the appropriate value by looking at strategic alternatives for another buyer. So it's one of those things that's an ongoing. How do you – I think you used the word, option value, optionality, I think that's a good word for it and we'll constantly look at that optionality and see which way makes the most value for us. Brad, do you want to add…?

Bradley A. Ferguson

The book values are a little over $200 million.

Donna Jaegers - D.A. Davidson & Co.

Okay, great. And then obviously you guys already on the last mile you had an agreement with Time Warner Cable to resell their last mile. Are you going to request that from Comcast now as well with this Comcast- Time Warner Cable merger process?

Joseph F. Eazor

We'd love to extend our relationship more broadly to Comcast and we're in process of paying attention to what's happening there and continuing to work with Time Warner Cable to be great partners to them and we expect to keep that relationship going in the future.

Donna Jaegers - D.A. Davidson & Co.

Okay. And then one last quick question on your go-to-market effort, the channel partner Avenue right now. Can you give us what do you get from as far as a percentage of revenues, how much does that generate for EarthLink currently?

Bradley A. Ferguson

Yes, in terms of the new bookings it's 20% to 30% and with our business customer base, it's – that's probably a good representation of what it makes in our base as well.

Louis M. Alterman

Yes, on the retail base that's excluding wholesale.

Joseph F. Eazor

Just a short anecdote or a short follow-up on that. I think we can do a lot better through our channel. As we've undertaken a large integration of bringing the companies together, we sort of – with our systems not being fully integrated and some of the quoting process challenges that's created, we have an opportunity to improve that process not only helps us sell directly to customers but it will help our channel partners work with us more effectively. So we have a lot of effort focused on improving our channel partners in the [post] (ph) market there.

Donna Jaegers - D.A. Davidson & Co.

Just one quick clarification too as far as 20% to 30% of the retail base that – so this is the retail CLEC base or does that include the consumer side as well?

Bradley A. Ferguson

Not consumer; everything but consumer, everything wholesale.

Donna Jaegers - D.A. Davidson & Co.

Okay. Thanks, guys.

Operator

(Operator Instructions). Your next question comes from the line of Lance Vitanza of CRT Capital Group.

Lance Vitanza - CRT Capital Group LLC

Hi, guys. Thanks for taking the question. So if I look from 3Q to 4Q, EBITDA fell sequentially about 6 million. From 4Q to 1Q, EBITDA was flat sequentially. So that plus the guidance, it looks like the company's an inflection point of sorts. So, can we expect flattish EBITDA from here on out or is there going to be any sort of lumpiness over the next couple of quarters? How should we be thinking about that? Thank you.

Bradley A. Ferguson

No, I don't think we're declaring victory on the inflection point. Certainly doing a lot to slow it down but the top line still in decline. We mentioned a lot of things we're doing to take out costs, but it's a little hard to keep pace with the revenue declines. Certainly looking for the bottom in the not too distant future but it would not say that we're there yet.

Joseph F. Eazor

Yes, and then just a follow-up on that. We've got a number of activities that I mentioned and some that are going to be launched soon, as I also mentioned, that will continue to help us on the cost side of the equation on our OpEx in our cost of revenue. And so we'll continue to fight to keep EBITDA as high as we can but the revenue decline, it's hard to keep pace with – keep the EBITDA number up on a revenue decline like it's been. So we have to keep working the revenue side of the equation as well. So we'll keep pushing both very aggressively and again, guidance is – we're pretty comfortable with our guidance for this year and I think as we look into next year, hopefully we can make – start to tell the full story of the impact on EBITDA improvements as it relates to revenue declines for next year.

Lance Vitanza - CRT Capital Group LLC

Thanks. Just one question on the balance sheet, if I could. The 400,000 shares repurchased in the quarter, I'm wondering how much basket capacity you have left for additional share repurchases if there are restrictions on those repurchases? And just how you think about deploying capital relative to share repurchases, debt repayment, dividend, maybe just a little discussion around that would be helpful?

Bradley A. Ferguson

Yes. So I think technically with our notes we have a few million dollars or so of restricted payments, but with our credit agreement on our revolver we're at a point now where we're pretty much – we're going to have to kind of shutdown the share repurchasing activity. There's a restriction there that will prohibit us from doing the – so if were able to do a little bit, like we said in early April, but wouldn't look for us to do much of anymore there going forward.

Operator

Your next question comes from the line of Arun Seshadri of Credit Suisse.

Arun Seshadri - Credit Suisse AG

Hi. Thanks for taking my questions. First, I just wanted to ask. In terms of the pricing increases in Q1, were they specifically as a result of the strategic review? And then in general, are you still expecting or your targeting churn – business services churn to be in the 1.5% range over the long run or are you expecting structurally for that to be potentially higher?

Bradley A. Ferguson

Yes, on the price increases that's really more just business as usual. It's operational discipline basically. So we do a review there and we've done these in the past, so I would tell you that. And then just where we're going with churn, certainly we're doing a lot to trying to lock down the base. Mix certainly helps over time just as you have fewer of the lower end customers as a proportionate of the total, but don't see the pressure on that lower end lighting up anytime soon. So that will certainly a pressure point, but we're looking to get it down from the levels that we saw this quarter.

Arun Seshadri - Credit Suisse AG

Okay. Thanks. And then as far as – so if it was business as usual on the pricing increases, then can you talk about sort of what the factors were and sort of why business services churn spiked a little?

Bradley A. Ferguson

Its business as usual for procedure but certainly the implication is that there could be some increased churn because of it. But we do have – you create more value by doing it then the small amount of churn that you might prompt.

Joseph F. Eazor

I think your question on churn there was a number of things that we've undertaken in last quarter and even starting before that, an effort to have more significant re-terming activities and that locks up our base but does force a decision sometimes on customers that were thinking about churn and sometimes they'll call an audible to churn. But overall it's more valuable to us to go through that exercise because it locks down our base and extends our contracts and it's a good activity for us to do. I think there was some churn activities related to some contracts that churned last year and it just takes time for the revenue to roll off and the timing of that revenue is something that's hard to predict 100% accurately when it churns. So we had a little bit do that spike in Q1. But then I think there is just the normal course and speed in the small business customer segment, like Brad mentioned, that churns rapidly that I think we can as we improve how we manage that business, I think we can do more to stabilize that churn rate over time. So all those things were happening in Q1 and again until last year and we got work to do to continue to re-term the lockdown to pace as well as to better stabilize the small business customer segment and attenuate the declines there, and continue to manage price increases, et cetera in a way that optimizes value. So there's a lot of stuff going on here. And then finally I'll say that from a churn perspective, we're looking for the senior executive that looks across functionally, across the entire company to drive our churn efforts and that will improve on how we just manage it internally which will also have pace in dividends.

Arun Seshadri - Credit Suisse AG

I appreciate the color. And then finally in terms of cost structure improvements, I think you talked about cost structure improvements helping in the quarter. Any color in terms of how big those cost structure improvements were and then were all of them realized within the quarter or do you see some sort of pull-forward into Q2?

Joseph F. Eazor

They'll be ongoing. So some of the cost structure improvements will be near term, some of them will be longer term. The majority of them will take effect later in the year and enrolling into 2015, but I want to be clear on a couple of things. Our guidance reflects this year's in realized cost productions. We'll obviously look for every way we can to accelerate that. Our guidance for '15 will reflect our hopefully improved run rate and our plans for '15 to continue to optimize our cost structure and investments. But we also will invest back in our growth businesses so that we can, not just attenuate declines but start to grow the business again. So, all those things being factored we'll issue in our 2015 guidance that will reflect all those different variables, if you will.

Arun Seshadri - Credit Suisse AG

Okay. I appreciate the color. Thank you.

Louis M. Alterman

I think we've got time for one more.

Operator

Your final question comes from the line of Anthony Klarman of Deutsche Bank.

Anthony Klarman - Deutsche Bank AG

Hi. Thanks. A couple of questions. First, maybe just starting on the balance sheet. You ended the quarter with cash of 109, but I think that 2Q and 4Q are your heavier cash usage quarters because of the timing of your interest payments. Could you just talk a little bit about how you think about liquidity and how do you think about liquidity within the confines of the decisions that the Board made with respect to keeping the dividend as is?

Bradley A. Ferguson

Yes, you're right on the timing of the interest payments, so we'll see those as 25 plus. Again they go out to Q2 and Q4. And then certainly as we look at our run rate and cash balance, our expectations of the business and what we can do we are able to get comfortable with the dividend. That's something that for the foreseeable future we intend to keep doing.

Anthony Klarman - Deutsche Bank AG

And does the Board have the dividend – I guess as the Board sort of talked about the dividend policy, does the Board have that tied to a metric of some sort or what was the sort of rationale or the comparison analysis like in terms of deciding to keep a dividend where it was?

Joseph F. Eazor

Yes, so the Board – we certainly looked at all factors with the Board including our cash flow projections, our shareholder base in interest of our shareholders and all the different uses of cash we have for investment inside the company. And so all those factors are considered and put our low range financial models together and made a decision that a great policy for us is to continue to pay the dividend.

Anthony Klarman - Deutsche Bank AG

Got it. And then if I could ask on CapEx. My understanding was that the majority of the CapEx was sort of being steered towards sort of revenue-generating opportunities and some of the growth products. So I'm wondering where the $10 million change came out of and does that have any implications on the inflection in terms of the timing of when you think the top line in business or total revenue actually inflects?

Joseph F. Eazor

Let me take the last part of that first is again I – our cash improvement and our CapEx optimization plans we do not see any negative impact on our ability to grow our business and get back on track to this company for growth. So, we're fully reflected in our ability to execute our CapEx plan and cash flow in our guidance and in future long range plan. The ability to manage CapEx and cash flow more effectively than we have as well as go to business or at least go to the key parts of the business with a path to growing the overall business. So I guess the short answer is we don't see any issue with being able to optimize our CapEx and cash flow like we did in Q1. On an ongoing basis we don't see that negatively impacting our ability to go to the business. I think the other part of your question is a majority of our capital does go to growth but the biggest impact – some of the biggest impact in our Q1 CapEx management has been on internal capital. So, we also have a chance to optimize how we spend our growth capital but it's an across the board item and we feel comfortable we can continue to do that. And so it will be on the path to long-term growth as well as maybe even accelerate it.

Anthony Klarman - Deutsche Bank AG

Got it. And a final question just from a cash flow perspective. The tax payment of 4 million that's on Slide 9, is that just a timing issue or is that a run rate that we should think about for the year? And if not, could you give us a sense as to what the right tax level to think about it is for 2014?

Bradley A. Ferguson

Yes. It's more of a timing thing and really expect around probably 5 million, 6 million for the whole year in that area.

Anthony Klarman - Deutsche Bank AG

Okay, great. Thank you very much.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Eazor for any closing comments.

Joseph F. Eazor

Thanks everyone for joining today and we as a team will continue to be transparent with you and regularly communicate our progress as we march along on our strategy and plan here. I am very excited to be here. Our opportunities are significant and look forward to executing the strategy that we've laid out, continuing to improve the business and creating the value that we can as a company. So, thanks for your time and attention and I'm sure we'll be talking to you soon.

Operator

Thank you. That concludes today's conference. You may now disconnect.

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