CenturyLink, Inc. (CTL) UBS 46th Annual Global Media & Communication Brokers Conference (Transcript)

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About: CenturyLink, Inc. (CTL)
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CenturyLink, Inc. (NYSE:CTL) UBS 46th Annual Global Media & Communication Conference December 4, 2018 1:45 PM ET

Executives

Neel Dev - CFO

Batya Levi - UBS Investment Bank

Analysts

Batya Levi - UBS Investment Bank

Batya Levi

Welcome to the UBS Global Telecom and Media Conference. I am Batya Levi with the UBS telco and media team. Our next presenter is Neel Dev, CFO of CenturyLink.

Neel Dev

I am glad you said it and not me.

Batya Levi

Welcome to our conference. My first question is as you take on your new role as a CFO of CenturyLink, maybe can you start to discuss about what the priorities of management will be for next year?

Neel Dev

Sure, good afternoon everyone, and thank you for your interest in CenturyLink. First of all a year into the integration we’re operating as one company. We made good progress on integration. We have realized synergies, we’re at that point in our execution that we feel good about not only just focusing on integration, but focusing on leveraging the scope and scale of our global assets and capabilities. So with that context in terms of our management priorities, we’re now focused on really improving the revenue trajectory of the enterprise business.

In terms of consumer, we want a improve penetration for our competitive assets and we want to improve penetration where we invest. In terms of the cost side of the house, we’re transitioning from focusing on synergies to overall cost transformation of the business. So at the highest level Batya those are our management priorities.

Batya Levi

Okay, great. May be we’ll start off with the integration of the two asset CenturyLink and Level 3. Can you provide an update on where we are right now in terms of your synergy target do you - you already realized about 90% of that much sooner than we thought. Is there more to be done and maybe will shift to the transformation effort after that?

Neel Dev

Sure. So in terms of integration, I would say it's a long list, but we’re - the way to summarize it is we’re at a point where we are operating as one company. And so things like organizational alignment CRM, ERP consolidation in North America and Europe, product disposition, network interconnection, major processes across the organization, lot of that work has been done. So we’re operating as one company is it optimized we've more work to do there, but that’s one of the cost transformation that comes in.

Q - Batya Levi

How do you think about the synergy target?

Neel Dev

So we’re like you said over 90% of what we said we were going to get to - we’re going to get to the 850 million of synergies in the fourth quarter. We will have more savings, but that will come more as cost transformation as we focus on that initiative going forward.

Batya Levi

Okay. And throughout the integration process can you talk about what surprised you maybe on the positive side or the negative side most of the easy gains taken out or is there more to come?

Neel Dev

Sure. So from an integration standpoint maybe I’m little bias because I was involved in the integration. But we had a fair amount of planning done during the integration phase so there weren't any major surprises. Now there's always things around the edges that you have to adopt to but one testament to that is if you look at the pace of the synergy realization we were suppose to get to the synergies over a three-year timeframe. We were able to get through 90 plus within four quarters and that was part of - because we didn't see a lot of surprises as we went into the execution phase.

Batya Levi

Okay. And what else is there to be done maybe part of the synergies or part of this looking at it more holistically in terms of transforming the cost structure?

Neel Dev

Sure. So in terms of the cost structure of the company, I think about it as three big buckets. One is off-net to on-net. So we will continue to move services on to our own network. When we announced the deal we said roughly half of our synergies were going to come from network expense. When we announced the synergies in third quarter earnings call, only 15% of those synergies were from network expense. So you can do the math so there is 300 more million to go from a network expense standpoint that will come over the next three years or so. So that's one category and that category will continue to grow as we add more buildings and more network so that will continue to grow.

Number two, I would say is overall digital transformation of the business. So what I mean by that is really looking at all of our customer touch points and moving that to a digital interaction. So if we think about the number of call centers we have, we've trained customers to call us. We want to change that, we want them to digitally interact with us. We send them manual bills, we want to change that, self-service from a service delivery service assurance perspective. So there's a list of initiatives that we’re working on that not only improve the customer experience, but it's better for us from a cost structure standpoint.

And then the third bucket would be network and infrastructure simplification. So as you think about some of our legacy services like voice switches as those services roll-off there is an opportunity for us to really optimize space, power maintenance and other costs and but that's going to be a long tail of cost that will continue to optimize. So those would be the three big buckets.

Batya Levi

Okay. Maybe we can dive right into CapEx, this year you’re coming in much lower than what you originally thought. Can you talk about the drivers for that and then maybe all these initiatives that you have in place are there going to require more investments to drive those synergies out or savings out?

Neel Dev

So from a capital standpoint, I would say that we put a lot of robust processes in place to make sure we’re getting a return on every dollar of investment and that's what drove some of the under spending this year. Sometimes you have to slowdown in order to go fast you want to make sure you're going the right direction. So some of that we saw this year.

We got the synergies early in the year so we got the full year benefit of that. We had a lot of efforts around recovering and redeploying network capacity and equipment, we saw some benefits from that.

We also have a very robust governance process in place now where we look at every investment make sure it's in line with our future strategy. We de-emphasized investment in the copper network on the consumer side and we’re investing in fiber. So combination of those things we saw a little bit of under spending this year.

Another way to think about it as we have created more headroom as we think about future capital investments, so we still think the 16% is about right in terms of modeling the business going forward. And that captures our need to invest in the business for revenue and also for EBITDA margin expansion.

Batya Levi

Okay. Maybe more specifically there were some surprise that the recent CapEx decrease came in so late in the year, were there any specific project that you would want to highlight that maybe you pulled from or is it all the drivers that you mentioned that's really the driver?

Neel Dev

Yes, it's really all those drivers and sometimes one of the things we’ve done over the years is try to compress the timeline it takes us to recognize a need for additional success based capital and deploy that in the network as our supply chain and the way we deploy capacity. And the fact that we found more opportunity to redeploy and run the network more efficiently that's what drove some of the under spending.

Batya Levi

Okay. And you mentioned that one of the focus on the cost structure is to bring more building customers on-net and that requires CapEx. So do you believe that that 16% of intensity captures that initiative as well?

Neel Dev

Yes, that’s factored in there. Right now we probably have 7,000/8,000 buildings in slide that we’re building too - so yes, that's already factored in there.

Batya Levi

Okay. And maybe let’s talk a little bit more about - how the deal enhances both companies product at customer reach. And in terms of how you would go about go-to-market in new products and sales people. Can you talk a bit about what are some of the changes you’re making?

Neel Dev

Sure. So in terms of the deal there's a lot of complementary benefits and complementary product sets. So if you think about legacy CenturyLink customers they now have access to international capabilities Europe, Asia Pac, Latin America lot of CDN capabilities. Going the other way legacy Level 3 customers have deep in region networks that we can sell into also SD-WAN capabilities so a lot of complementary capabilities.

If you step back and look at it from a customer standpoint on a combined basis now, it's an unparalleled set of assets globally and a very broad set of capabilities and we’re leaning in with customers to try and help them through their technology transitions.

Batya Levi

Okay. And are you - part of it was maybe reaching out to enterprises, but not having the full suite of capabilities ready. Where are you in terms of that process, is there more to come or do you believe that you have all those capabilities and the sales force behind it to go after these different cohorts of customer segments you have?

Neel Dev

There is always room for improvement, but we believe we have a very broad set of capabilities that's resonating with our customer base. And we’re continually rolling out new capabilities. So we rolled out Cloud Connect, Dynamic Connections it's basically if you're on CenturyLink network, you can dynamically turn-up connections and turndown connections to different cloud provider so that would be an example.

We continue to do invest in other capabilities. We think we'll resonate in the marketplace, but if I really step back and we have a fairly broad set of capabilities to go to market.

Batya Levi

Okay. Synergies have been coming in earlier than we thought but revenues have been under pressure in the last couple of quarters. And part of it you’ve explained it is seems to be design as you’re exiting some of the unprofitable contract. Can you give a bit of more update on that and as you look through your customer list, do you think that there will be more of that cleanup to happen?

Neel Dev

So I think what we're trying to do is really focused on profitable revenue going forward. So I think there is a few different dynamics going on. There is a set of dynamics with products and services we deemphasized like IT, and managed services, CPE where it doesn't come along with network. So you’re going to see some accelerated churn related to that. There is churn from legacy products like voice that's always had a very long tail and will have a long tail going forward.

And then there are products and services that are growing. And the challenge is I think it's hard to kind of predict that at the intersection of those that on the top line basis. In terms of accounts or customers per se, we don't have any major customers that are unprofitable, but the dynamics that I explained we will be working through that at a customer level where there on services that are may not be go forward services we’ll continue to transition them on to newer products and services that are more profitable.

Batya Levi

And how long would that process take, I am sure it has a long tail as well as some of the contract come up for renewals leaving maybe the legacy voice data on the side. As you look through your product sets and accounts, how long would that process take?

Neel Dev

Yes, that’s hard to say what I would say is our objective is to improve the revenue trajectory for the enterprise business.

Batya Levi

Okay. Enterprise in general had I guess there is some weakness on a macro level. Can you talk a little bit about what you are seeing from your end in terms of customer demand and maybe pricing competition?

Neel Dev

So we’re leaning into the enterprise marketplace. We are taking share so we don't - we think pricing dynamics are good. We don't really see any issues the underlying demand trends are good. Part of the challenge is when you go through technology transition and you have legacy services day one there is a step down in terms of ARPU but still profitable from our vantage point but over time it grows as demand grows, bandwidth grows, connectivity requirement grow. But we see the demand trends as being healthy.

Batya Levi

Okay. And can you talk a bit more about competition, I guess something that we hear from your peers is that you're definitely showing up more in terms of as these accounts come up for renewal. How are you doing things differently than CenturyLink did before?

Neel Dev

I don’t know if it's different than what CenturyLink did before, but what I would say is we are leaning into the technology transition. So if you go to a customer and you just want to do a paper write-down that's one way of keeping the revenue for a short incremental period of time. But what we believe is really with the overall underlying demand growth and connectivity needs, we need to lean into that technology transition even though that might mean a bigger revenue write-down at day one. And so we are leaning into that and we’re doing well and taking share in the enterprise marketplace.

Batya Levi

Maybe within that there is the debate about SD-WAN, hybrid services, the impact on MPLS. Can you update us on what you see there?

Neel Dev

Sure. We get that question a lot, so I think - SD-WAN is just another part of our product portfolio. The question we get a lot as well as SD-WAN cheaper than MPLS. Yes, on a node basis, yes well SD-WAN is also cheaper than 100 gig wave. But other than the really small end of our SMB business we’re not selling single node networks, we’re selling 200/300/400 node networks. And when you think about SD-WAN that’s just another capability that enables us to win more business.

So especially when you think about a customer with a lot of international locations or locations that were not addressable to us before is now addressable. So the more of the customers network becomes addressable your chances of winning goes up. So we think SD-WAN and any technology has positives and negatives, but net, net we think is positive for us from an enterprise perspective.

Batya Levi

Okay. And you would say that in terms of overall penetration of the revenue market, your market share gains and the profitability as well of that combined product?

Neel Dev

Yes, we think when we looked at overall hybrid networks we think it is actually net positive because it enables us to win more business.

Batya Levi

Okay. And on the SME side, there has been some incremental pressure that shows up in the numbers. Can you talk about what you're seeing in the small mid-size enterprise market?

Neel Dev

On the small and medium-sized market, our churns has been relatively stable and even in the small end I think there's an opportunity for us to improve sales. If you think about the legacy Level 3 business, Level 3 never focused on the SMB market. And so we have a large on that building footprint that we can sell into to offset some of that churn. We have some initiatives around it, but so far I think there is room for improvement, we haven't quite ramped up the sales like we would like.

Batya Levi

When would that start to ramp?

Neel Dev

So we’re focused on it and but we haven't been gotten meaningful traction yet but hopefully we'll continue to see some improvement there.

Batya Levi

Okay. Any trends internationally that you would like to highlight maybe you mentioned also any opportunity for CenturyLink side to pick up new sales internationally?

Neel Dev

So internationally our business is doing fairly well other than currency headwinds. Our overall international business is growing and we’re focused on having the sales for sell into other regions. So we’re seeing some traction, we think there is more room for improvement and we’re focused on it.

Batya Levi

Okay. Maybe shifting to the consumer business, we had seen some accelerating declines in that partly because of churn on the subscriber side. Competition seems to be stopped there as well, is that - do you feel as this is the new norm of that segment?

Neel Dev

So for consumer most of the decline that you've seen is really accelerated decline from our linear video business. So we stopped marketing that in the first quarter of this year. And so you're seeing the impact of that voice declines have been generally in line with what we've seen in the past. I think there is an opportunity for us to improve the performance of our broadband business. And we have a series of initiatives in terms of micro targeting to really figure out how we improve the performance of that business with increased penetration.

Batya Levi

Of the broadband business…

Neel Dev

Of the broadband.

Batya Levi

Can you give us an update on what maybe your speed capabilities and also how you plan to attract sort of the DSL portion of it versus the fiber-to-the-node portion of it?

Neel Dev

Sure. So we have a lot of work going on, on consumer in terms of really understanding what is a competitive asset for us. So as you can imagine 20 megabytes in an urban market with a number of competitors is not the same as if you are the only alternative in a rural market. So we’re trying to do that work and really focus on increasing penetration with micro targeting efforts for the competitive assets.

But we've also stopped any investment in the copper network because long-term we believe it's the fiber assets that will continue to gain traction. And for any of our investments going forward it will be fiber and will be focused on increasing penetration there.

Batya Levi

Okay. And looking at it together would you expect similar trends to continue in broadband maybe you take a bit of share on fiber assets and the DSL continues to decline?

Neel Dev

We’re still working through that but our objective would be to improve the trajectory of that. Although Price for Life has given us a fair amount of ARPU benefit in the last few quarters so we have to keep that in mind.

Batya Levi

What's your view of the impact on 5G fixed as that ramps up over the next few years?

Neel Dev

So 5G will have an impact on some portion of the consumer business, but again fiber is very competitive relative to 5G and therefore our focus on fiber even for consumer. For the enterprise business, we think it will be net positive so as some of our wholesale customers rollout 5G networks hopefully we’ll benefit from that. 5G also has a mechanism for access. Last mile will be an option for some applications backup redundancy et cetera and so we’ll stay plugged into that as well.

Batya Levi

Okay. And cash proceeds also allow you to expand your footprint on the DSL side. How should we think about that going forward?

Neel Dev

So yes we’ll continue to meet our cap obligations. So we continue to build out, I think it's over 1 million households and by definition those are underserved areas and we’ll focus on driving our penetration for those assets.

Batya Levi

And I think the FCC is also looking at potentially elongating that pool if the reach is 25 megs or better. Do you envision participating in the second round of cap auctions?

Neel Dev

So, we’re plugged into all those discussions and if it makes sense for us absolutely.

Batya Levi

Okay. Within consumer you mentioned that the fiber piece would be important, at least they used to be earlier targets in terms of expanding the fiber assets couple of million a year. How should we think about how much of your capital allocation would go towards fiber more specifically for the residential side as opposed to the enterprise side?

Neel Dev

So we don't believe in having specific goals from a footprint standpoint. I think our approach is going to be very, very success based. So we’re doing a lot of work around which neighborhood it makes sense to build given the nature of our plan, the competitive landscape in that neighborhood. And I don't mean it even at city level at a neighborhood level and where we've kicked off several bills. We will see how we do against those in terms of penetration and performance against our business cases. If we're doing well, we’ll continue to ramp it up, but it’s going to be very success-based approach.

Q - Batya Levi

Okay. And maybe just going back to the enterprise side, we talked about some of the products that you are not focusing on that much. But generally speaking you’ve mentioned that the sales momentum is picking up. Sales force is incentivizing a way that they have the full capabilities to attract these customers. Where are we in the process of in terms of turning those bookings into actual sales, has that process gone any faster than the last couple of quarters. And can we expect the enterprise revenue trends to improve from here?

Neel Dev

So the bookings have improved and so that's a good positive leading indicator. Keep in mind some of these networks are several hundred nodes across the globe so it takes time to get them all turned up. And then we generally talk about sales as a leading indicator because in our business there's a lot of other things that go into the revenue line in terms of churn, usage, nonrecurring revenues that we have every month like professional services and things like that. But in general given the leading indicator we expect the revenue trajectory to improve for the enterprise business.

Batya Levi

Okay. And then we touched on different segments that you have putting it altogether, can we expect the revenue trends to improve from here. I think I would say the expectation had been that it would have been more stable when you put the two companies together, and slightly by design we have seen a bit of an acceleration to revenue decline where are we right now looking out, couple of quarters, a few years however you want to address it?

Neel Dev

Sure. So I think candidly we've got some competing trends of the top line right now based on everything we just talked about right. So we have things that we have deemphasized that path, accelerated decline by the way most of those things are better for our bottom line. We'll have ongoing churn from voice and other legacy services that has always had and will have a long tail. And then there are products and services that are growing.

Combination of those things it's hard to kind of say how those intercept at the top line and that's why we’re always focused on continuing to grow EBITDA and free cash flow.

Batya Levi

Okay. Maybe EBITDA then, there is this original guidance that you could - or target that you could improve margins by 500 basis points over several years. Do you think that still holds?

Neel Dev

Sure. So if you look at third quarter of this year relative to third quarter of last year, we expanded EBITDA margins by 380 basis points. So we still feel good about - something in that ZIP Code.

Batya Levi

Okay. So I guess it sort of high 30s, 40% margins overall for the combination of this business enterprise and consumer. Is that an reasonable expectation for the overall business?

Neel Dev

Yes.

Batya Levi

Okay. Maybe shifting to the balance sheet, maybe if you could provide us an update on where you would like to take the leverage where we are right now how quickly do you get there? And how do you think about all the moving parts in terms of capital allocation?

Neel Dev

So we have a very balanced approach. We’re investing in the business, we’re returning a fair amount of cash to shareholders and we paid down a fair amount of debt this year. So looking forward I think we will continue to have a balanced approach where we're doing all three. I don't think we’re constraining, investing in the business. We had some benefit this year from lower capital spending, going forward we’ll continue to have a balanced approach.

Batya Levi

And the leverage target?

Neel Dev

We are three to four times we'd like to be at the lower end.

Batya Levi

At the low end.

Neel Dev

Over time, yes

Batya Levi

Okay. And how do you think about the dividends, the dividend payouts? We get the question a lot that the last time CenturyLink cut the dividends, we were looking out - they were looking out about an 80% payouts and didn’t feel that was sustainable. How do you think about the dividend?

Neel Dev

So we're comfortable with the payout ratio. So if you look at our payout ratio this year it was in the mid-50s and we did have some one-time benefits this year from lower capital spending from tax refunds. We net off making a $500 million contribution to the pension fund. So if you look at all that and normalize our payout ratios, we’re in the low 70s any reasonable expectations for us for the next few years you still see very good dividend coverage. So we’re comfortable with the payout ratio.

Batya Levi

Okay. And that assumes that the - sort of that assumes that EBITDA will continue to ramp from here?

Neel Dev

That is our objective.

Batya Levi

Okay. And maybe just looking through your asset mix if you can talk about, if you feel like there are certain capabilities the regions that you would want to get bigger in, any assets that you aspire to own?

Neel Dev

So we’ve got pretty good assets in North America. I think we’ll continue to focus on adding network in Europe, Asia and Latin America that's where we see the opportunities. We continue to build additional small metro loops in a lot of those markets, but we’ll look at both organic and inorganic options there.

Batya Levi

Okay. And one thing as you ramp and penetrate the enterprise market, do you feel like not owning a wireless network or wireless capability hinders you versus competition is wireless important for the bundle?

Neel Dev

We haven't seen it, I think most people like to have their own devise, there a lot of enterprise application that runs on mobile devices, but in terms of how you sell to enterprise we don't see that's an issue.

Batya Levi

On the consumer business you’ve decided you would continue to invest where it makes sense and when it’s more for profitability. Do you view the consumer business as a strategic business for the overall company?

Neel Dev

So we think we can continue to improve profitability from that business. From that perspective we’ll continue to focus on it and we continue to believe that we can generate good cash flows from that business.

Batya Levi

Okay, great. I think we’re going to end it there. Thank you so much.

Neel Dev

Thank you.

Question-and-Answer Session

Q -