CenturyLink CTL.US
May 10, 2019 - 7:47pm EST by
BenHillGriffin
2019 2020
Price: 10.89 EPS 1.27 1.52
Shares Out. (in M): 1,080 P/E 8.6 7.1
Market Cap (in $M): 11,600 P/FCF 2.85 2.76
Net Debt (in $M): 35,573 EBIT 8,435 8,544
TEV ($): 47,332 TEV/EBIT 9.9 9.7

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Description

Business Overview 
CenturyLink is the result of the $32bn October 2017 merger between Legacy CenturyLink and Level 3 Communications (~$7bn cash, resulting in 51%/49% PF ownership split). Both legacy companies themselves were the product of numerous acquisitions. CenturyLink was historically an incumbent local exchange carrier (“ILEC”) with significant exposure to secularly declining businesses like voice and DSL, on an antiquated copper-based (as opposed to fiber) network. Through acquisitions (Embarq for ~$12bn in 2009, Qwest for ~$22bn in 2011), however, Legacy CenturyLink also had a sizable fiber network and large enterprise business. Legacy Level 3 is a tier-1 fiber network serving primarily business end markets and is also the product of numerous acquisitions (Global Crossing for ~$3bn in 2011, TW Telecom for ~$6bn in 2014.) 
Legacy CTL represents ~2/3 of combined EBITDA. The combined company now has ~75% of revenue from business customers. Approximately 1/3 of combined company revenues are secularly challenged – voice, DSL, wholesale UNE. 

Situation Overview 
Shares have declined ~50% since August. However, given the significant (4x EBITDA) leverage, the enterprise value has only declined ~20%. Shares have re-rated from ~6.8x consensus NTM EBITDA in August 2018 to ~5.5x today. Legacy CTL historically traded from 5.5x to 6.5x EBITDA; legacy LVLT (now ~1/3 of EBITDA) traded from 9-10x EBITDA, sometimes higher. Zayo is also a fiber business, albeit with a more transit-focused (as opposed to services) model, and trades at ~10x EBITDA and has historically ranged from 9-12x EBITDA. However, Zayo is under pressure from Starboard to consider a sale and has also considered a REIT transformation, which impacts the comparability of multiples. 
Since closing the merger in October 2017, integration got off to a strong start, with management significantly outperforming synergy targets (hitting full target 2+ years ahead of time) and raising 2018 EBITDA guidance ~3% and FCF guidance 30%+ in 1H. While management was able to hit the increased guidance (beat high end of initial 2018 guide), 2018 FCF benefitted from a few non-recurring items (tax, working capital) which led to disappointment following 2019 FCF guidance. 
Furthermore, in September 2018, well-regarded CFO Sunit Patel departed for T-Mobile and subsequently, in Feb 2019, CTL cut their sizable dividend, which management had previously assured investors (many dividend-focused) was safe. Management contended this was not due to a change in their view of the businesses trajectory, but rather to focus capital allocation on de-leveraging more rapidly, with a target of 2.75-3.25x within 3 years. 

Summary Long Thesis: 
This is a high fixed cost business facing secular pressures in an industry known for price deflation and over-building, the product of two decades-long roll-ups, with significant financial leverage, a recent CFO change, and a recent financial controls disclosure. It’s basically everything a short-seller could wish for. However, after the dramatic re-rating of the shares and all of the bad news you were likely playing for short (dividend cut, FCF guide down) having already played out, there is real value and scarcity in the fiber-based enterprise business ($50bn+ of gross PP&E), particularly hard to duplicate metropolitan fiber. While fiber faces pricing pressure like all of telecom, it is a secular share gainer driven by both long-term growth in data consumption as well as the shift from copper to fiber. While new technologies will always come and go, they are likely to continue to ride on top of a fiber infrastructure. Additionally, new CTL is now the #2 player in the ~$90bn commercial market and is likely well positioned to gain share. AT&T and Verizon represent ~50% of the commercial market, are not focused on enterprise, and are consistent share donors. CEO Jeff Storey had a strong operational and integration track record at LVLT, driving a 1000+ bps increase in EBITDA margins and a triple in the shares during his tenure. Near-term debt redemption issues are minimal and well-covered by cash flow. 

Target Valuation: 50-100%+ Upside vs. 20% Downside
My base case target valuation is based on ~6x ’21 EBITDA (burdened by SBC and excluding CAF II income) of $8.6bn which implies a share price of ~$17 + $1.75 of interim dividends for 50% upside and an ~28% IRR. My bull case is 6.6x 2021 EBITDA (burdened by SBC and excluding CAF II income) of $9bn for a share price of $24 + $1.75 of interim dividends for 100% upside and a 50% IRR. My bear case is 5.3x $8.2bn of 2021 EBITDA (burdened by SBC and excluding CAF II income) for a share price of $8 + dividends for ~20% downside. 

Key Thesis Points 
#1: Conduit-based fiber footprint is best-in-class and nearly impossible to duplicate (>$50bn of gross PP&E). 
CTL has 450k route miles of fiber, 37.5k miles of subsea fiber, 16k miles of conduit, >150k on-net fiber buildings. AT&T, Verizon, Comcast, and Zayo have 1.1mm, 520k, 145k, and 113k route miles of fiber, respectively. Building a fiber network in a high density metropolitan area is difficult – requires significant permitting, similar to tower businesses; however, once “on-net”, a building delivers revenues at high incremental margins; CTL’s conduit-based network is an important advantage. 

#2: New CTL is the #2 player for business end-market and a likely long-term share gainer 
Combining Legacy CTL and Legacy LVLT’s sizable commercial businesses results in the #2 enterprise connectivity provider after AT&T and ahead of Verizon. AT&T and Verizon represent ~50% of commercial wireline market and are steady share donors. Their networks are predominantly copper and management is not investing heavily in the commercial market. Combining Legacy CTL and LVLT network allows for both an improved value proposition to customers as well as a better cost structure with more buildings “on-net” in the combined network. Further, without having to pay other providers (“off-net”), not only is there a large cost opportunity in network access costs, new CTL can price business and compete more effectively. 
“Our chances of winning go up a fair bit more, because on any given bid, we can serve more locations on-net than each of the companies could on a standalone basis. And the more locations you serve on-net, meaning the less you have to rely on your competitors to win the business, which is always a good thing” – JPM Conf, 5/16/18 
Additionally, given their newly combined scale, CTL has found they are invited and able to bid more competitively on larger business. Given the longer sales cycle of large enterprise deals, there could be a lag before this benefit begins to take hold. 
“We see that as the second largest in wireline, enterprise business, we use that to fight at Level 3. We had to fight to be included in the competition. Now, we're automatically included in the competition, so that gives us greater opportunities to win business from customers.” – GS Conf., 9/12/18
“Given the scale and the size of the combined company, we're now seeing interest from customers being invited to the table for larger deals which we view as a positive” – JPM Conf. 5/16/18

Customers also believe CTL is more likely to invest in their network than AT&T and Verizon who are distracted by other businesses (5G build-out, entertainment). The business market is ~75% of revenue for CTL vs. teens for AT&T and Verizon. 

"To industry consolidation point, now that we are the second largest provider, it'd be tough to someone who is soon to invite CenturyLink to look at this, because chances are with our connectivity fabric, we can probably give them a sharper offer than anyone else. And more importantly, as they change from where they are to where they want to go, we actually are willing to put the capital to work to establish a new connectivity fabric and willing to spend the capital, which is a very different situation from what our competitors are facing with huge demands on 5G infrastructure, huge debt loads for media purchases and so on and so forth. So I think that that really helps us.” – BAML Conference 9/6/18
Competition from cable is on the much lower end of commercial end-market. Legacy LVLT previously gave disclosure that 75%+ of North America CNS revenue was from customers paying >$10k/mo vs. cable companies serving <$2k/mo ARPU customers, and often much lower. It's more likely that the integrated CTL sales infrastructure with larger on-net footprint is able to more aggressively pursue the cable companies’ lower end SMB market than the reverse. 

#3: Execution on integration has been strong – shares have declined as estimates have gone up. 
Management initially guided to achieving 80% of $850mm opex synergy target over 3 years; instead they hit the full amount within a year. In tandem with the synergy outperformance, management increased initial 2018 EBITDA guidance ~3% during the year and beat the high end of initial guidance. Subsequent to achieving the synergies 2+ years ahead of schedule, management introduced an incremental $800-1bn “transformational” savings target. While management is guiding for these to scale linearly over ~3 years, and current guidance only considers such, their track record indicates they are being highly conservative. 

#4: Cost opportunity is large enough to drive EBITDA growth; consensus expectations are skeptical. 
Despite delivering on synergy targets and raising guidance, consensus expects flat EBITDA. At the initial time of deal, management guided to 500-700bps of EBITDA margin expansion opportunity; in the first year, they’ve gone from 36% to 38%. Additionally, management has consistently spoken to the company being capable of consistent EBITDA growth. 
“I think when I am sitting here saying, I look out the next five years and we should generally be able to grow EBITDA every year, that sums up a lot.” – BAML Conf, 9/6/18
“Clearly the driver for EBITDA growth in the short-term is driven by the cost savings and there is plenty next year. I don't think there's any air pockets if anyone is thinking that. But over time, as you narrow the revenue declines, and make that grow the total revenues of the company, it transitions well. So the summary I would say is we're an EBITDA growth company. I think that's the bottom-line, and you can have your views on it, but that's we firmly believe in that and that's what you'll see out of us” – BAML Conf., 9/6/18 
While investors reasonably fear that increasing EBITDA margins through synergies on declining revenues eventually hits a wall, expenses appear deflationary as well. In 2017 and 2018, excluding the benefit of synergies, expenses fell at ~60% the rate that revenues declined, with an improving trajectory in 2018. 

#5: Transformation efforts may drive growth/stem revenue declines after front-loading some lower or no-margin revenue pressures. CTL has experienced significant “voluntary” revenue pressure from self-inflected actions to move away from low-margin/unprofitable business that will fade away post 2018. New management has reset a number of unprofitable contracts and walked away from unprofitable Prism video business. Some reports suggest Prism revenue is down ~50% in 2018, this alone could be as much as an ~300bps consolidated revenue headwind. Additionally, moving away from low-margin to unprofitable CPE sales and individual contracts are also impacting revenue ($30-40mm quarterly impact disclosed in Q3). As these one-off revenue headwinds fade in 2019, revenue pressures should moderate. 
Importantly, the next step of cost-saving “transformational” activities are focused on improving the customer experience: 
“I love telecom, one of the things about it is and I firmly believe this, and I've talked about this for a long time that if you drive costs down, you drive customer experience up” – GS Conf., 9/12/18
“Most of the things that drive cost in our business, are dissatisfaction points for our customers. We take 40 to 50 million calls every year. And I had our call center people when I came to CenturyLink say hey you know if we could if we could cut this each call by 30 seconds, think how much money that would save. And my answer is, you're looking at the problem wrong.
I want you to save the 30 seconds figure out how to do that. But how do you make the 40 million or 50 million calls 20 million calls, because these calls are coming to us because the customers are dissatisfied about something whether it's their bill or their modems not working properly or they're calling us about something. How do you reduce those number of calls, if we can do that we drive cost down, we don't have to handle 20 million calls. And we drive customer experience up” – GS Conf., 9/12/18
“We can continue to upgrade technology to make sure that as we go into a building that we can serve a variety of services. And if a customer calls us, it's a matter of typing in commands to provision service as opposed to doing truck rolls and other things. And so, we'll continue to expand not only the footprint of the network, not only to add new buildings but the fundamental capabilities of the network.” – Q4’18 Call 

#6: CTL is now being managed by LVLT’s highly capable CEO Jeff Storey. Storey joined LVLT via acquisition as COO and became CEO when LVLT faced integration challenges in 2013. During his tenure at LVLT, EBITDA doubled with margins expanding from 25% to 35%, resulting in share price tripling. Over ~4 years with Storey at the helm, LVLT outperformed synergy expectations and successfully integrated numerous large acquisitions with a focus on enterprise end-markets (shifting enterprise mix from ~55% to 75%+). Additionally, Storey took LVLT from negative FCF to >$1bn

Key Risks/Bear Case & Related Thoughts 
This is obviously a hairy, levered situation and I will do my best to address many of the key issues as well as my thoughts on a few mitigants. 

Significant financial leverage: at 4x leverage, cutting dividend to hasten de-leveraging is likely the right call. Maturities are not imminent; company generates ~$2bn of post-dividend FCF p.a. vs. ~$3.5bn of debt maturing in next 3 years. 

Synergies run out; secular revenue pressures may not: history of telecom has required managing costs through deflationary technology cycles and loss of legacy revenues. Given large reputational difference in operational capabilities between prior CTL management and new (former LVLT) management, combined with success on initial synergies, opportunity for cost transformation could be larger than appreciated. 
Competition from cable in business end-markets: cable competes on much lower end of market – average ARPU of <$2k/mo vs. >$10k for CTL. Historically, CTL has not focused heavily on lower end of business market; believes they can compete more aggressively there given scale and cost structure 

MPLS -> SD-WAN transition: Deflationary pricing from software-defined networking has been a consistent fear. I’m not an engineer so I will provide management’s commentary and acknowledge this is a key point for further diligence. 
“The question we get a lot is, "well, is 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 are not selling single node networks. We're selling 200, 300, 400 node networks. And when you think about SDWAN, 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 customer's network becomes addressable, your chances of winning goes up. So we think SD-WAN -- any technology has positives and negatives, but net-net, we think, is positive for us from an Enterprise perspective” – UBS Conf., 12/4/18
5G may displace usage of fiber:
“I think with 5G, we're excited about the opportunities. We are big, we're obviously the largest provider of long haul fiber in the U.S. We are a substantial provider of metro fiber. You can expect us to be fairly aggressive at trying to win 5G builds or being part of that build up. And so you'll see us play in that market.
We like it because it extends our fiber in the metro. We think that business in itself should be profitable for us, but in addition we get to extend our network to both take down cost and extend our addressable market within any city. So, I think you can expect us to be pretty aggressive on that front. And especially where we are the local phone company, we should be able to do quite well. We already have a lot of fiber and we can extend fiber easier than somebody trying to do from scratch. So, I think we have advantages in quite a few markets, and even the Level 3 fiber footprint in urban areas has been pretty strong. So I think that – together that's an advantage.” – BAML Conf., 9/6/18
“Wireless means exactly what the word implies, which is just a little less wire. Communications wants to get to glass (fiber) as quickly as it possibly can” – Oct. ’16 Deal Call 
“The world talks about wireless and everything is going wireless, but it's – and it's not even in the last mile anymore. It's the last hundred feet that are wireless.” – GS Conf., 9/12/18

CFO Change: He did leave for a larger scale integration opportunity (T-Mobile + Sprint), but this is certainly alarming. Sunit Patel was a critical part of the team (along with Storey) that delivered Legacy LVLT’s strong integration track record. This is certainly a point worth further investigation. 

Key Modeling Considerations/Assumptions Behind Target Valuation: 
Base Case: ~1% EBITDA growth primarily driven by cost saves; trade at 6x EBITDA. Blended multiple based on 5.25x for legacy CTL, 7x for legacy LVLT. In this scenario, steady EBITDA + de-leveraging sub 3.5x likely leaves the implied fully-taxed FCF yield (14%) too high; could argue for higher multiple. 
Bull Case: LSD EBITDA growth primarily driven by cost saves; trade at 6.5x EBITDA; shares traded above this multiple recently. Blended multiple based on 5.5x legacy CTL, 8x for legacy LVLT. This 2021 EBITDA is more conservative than simply taking 2019 and adding stated synergies/transformation benefit (flat revenue). 
Bear Case: Accelerating EBITDA declines (synergies fail to offset revenue pressures); trade at ~5x EBITDA (blend of 4.5x and 6.5x) . 
Additionally, to sanity check the multiples, I ran two simple DCF’s: 
One could argue for a wide range of WACC’s given the leverage as well as the combination of a low beta, but high cash flow/equity yield; I used PV8-9. 
Run-off DCF: PV8-9 imply 6.2x and 5.5x EBITDA, respectively. EBITDA holds flat for 2 years driven by cost saves, but declines essentially into perpetuity with EBITDA margins bottoming in the low-30’s; capital intensity declines from 16% to 10% over time as management realizes this is a run-off business. 
Modest EBITDA Growth: PV8-9 imply 6.7x and 7.6x EBITDA, respectively. EBITDA grows 1-2% for ~10 years before fading down to a terminal low 30’s EBITDA margin. Capital intensity remains 100-200bps higher than run-off case, but does decline as business begins to decline. 

Other Key Analytical Considerations:
I include $3.2bn of tax-affected pension and retiree healthcare liabilities in Adj. EV. I also include ~$1.5bn of federal NOL’s at PV8 based on $7.3bn of federal NOL’s. While legacy LVLT traded at >10x EBITDA, we must acknowledge that there was superior top-line growth (and higher expectations) at the time. Additionally, Frontier is a comp for parts of Legacy CTL and trades <5x EBITDA; however, Frontier has more exposure to copper infrastructure and consumer business which faces more aggressive challenges from cable.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Beat/raise EBITDA guide on back of transformation benefits through-out year and fading of voluntary revenue headwinds. Management has history of guiding synergies extremely conservatively (see above discussion). 
Enterprise shows consistent revenue growth
Continued expense management beyond synergies 

Management have indicated they are open to considering value-creating strategic alternatives for consumer business: 
“Really you're asking, are we willing to divest the Consumer Business, which we look at it. The answer is, of course. In fact, if you look at our data center sale a couple years ago, you see we asked the same question about various parts of our business. So, we are continually looking at the businesses we're in and saying, what should we do with them, how should we operate them, how well are we executing?
If you look at the Consumer business, it's only 25% of our revenue. And we are clearly targeting Enterprise customers for our growth and as the fundamental part of our business. And so, it always makes sense to look at it, but we look at it through the lens of, how do we generate the best return for shareholders? And in some cases, that's continue to operate those businesses and some cases it might be to do something else. And that is the lens that we'll look at it through, is how do we – we're not married to the business. We don't feel that we have to be in it, but how do we best return value to shareholders?” Q4’18 Call 

Large shareholders (Southeastern, ~6% shareholder) have advocated for separation or tracking stock creation: Temasek also owns ~9% of shares. 
Zayo, which also owns fiber assets, has seen activist involvement as well as Private Equity interest
However, management recently put in place a poison pill to prevent change of control provision that would cause CTL to lose NOL’s. 

 

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    Description

    Business Overview 
    CenturyLink is the result of the $32bn October 2017 merger between Legacy CenturyLink and Level 3 Communications (~$7bn cash, resulting in 51%/49% PF ownership split). Both legacy companies themselves were the product of numerous acquisitions. CenturyLink was historically an incumbent local exchange carrier (“ILEC”) with significant exposure to secularly declining businesses like voice and DSL, on an antiquated copper-based (as opposed to fiber) network. Through acquisitions (Embarq for ~$12bn in 2009, Qwest for ~$22bn in 2011), however, Legacy CenturyLink also had a sizable fiber network and large enterprise business. Legacy Level 3 is a tier-1 fiber network serving primarily business end markets and is also the product of numerous acquisitions (Global Crossing for ~$3bn in 2011, TW Telecom for ~$6bn in 2014.) 
    Legacy CTL represents ~2/3 of combined EBITDA. The combined company now has ~75% of revenue from business customers. Approximately 1/3 of combined company revenues are secularly challenged – voice, DSL, wholesale UNE. 

    Situation Overview 
    Shares have declined ~50% since August. However, given the significant (4x EBITDA) leverage, the enterprise value has only declined ~20%. Shares have re-rated from ~6.8x consensus NTM EBITDA in August 2018 to ~5.5x today. Legacy CTL historically traded from 5.5x to 6.5x EBITDA; legacy LVLT (now ~1/3 of EBITDA) traded from 9-10x EBITDA, sometimes higher. Zayo is also a fiber business, albeit with a more transit-focused (as opposed to services) model, and trades at ~10x EBITDA and has historically ranged from 9-12x EBITDA. However, Zayo is under pressure from Starboard to consider a sale and has also considered a REIT transformation, which impacts the comparability of multiples. 
    Since closing the merger in October 2017, integration got off to a strong start, with management significantly outperforming synergy targets (hitting full target 2+ years ahead of time) and raising 2018 EBITDA guidance ~3% and FCF guidance 30%+ in 1H. While management was able to hit the increased guidance (beat high end of initial 2018 guide), 2018 FCF benefitted from a few non-recurring items (tax, working capital) which led to disappointment following 2019 FCF guidance. 
    Furthermore, in September 2018, well-regarded CFO Sunit Patel departed for T-Mobile and subsequently, in Feb 2019, CTL cut their sizable dividend, which management had previously assured investors (many dividend-focused) was safe. Management contended this was not due to a change in their view of the businesses trajectory, but rather to focus capital allocation on de-leveraging more rapidly, with a target of 2.75-3.25x within 3 years. 

    Summary Long Thesis: 
    This is a high fixed cost business facing secular pressures in an industry known for price deflation and over-building, the product of two decades-long roll-ups, with significant financial leverage, a recent CFO change, and a recent financial controls disclosure. It’s basically everything a short-seller could wish for. However, after the dramatic re-rating of the shares and all of the bad news you were likely playing for short (dividend cut, FCF guide down) having already played out, there is real value and scarcity in the fiber-based enterprise business ($50bn+ of gross PP&E), particularly hard to duplicate metropolitan fiber. While fiber faces pricing pressure like all of telecom, it is a secular share gainer driven by both long-term growth in data consumption as well as the shift from copper to fiber. While new technologies will always come and go, they are likely to continue to ride on top of a fiber infrastructure. Additionally, new CTL is now the #2 player in the ~$90bn commercial market and is likely well positioned to gain share. AT&T and Verizon represent ~50% of the commercial market, are not focused on enterprise, and are consistent share donors. CEO Jeff Storey had a strong operational and integration track record at LVLT, driving a 1000+ bps increase in EBITDA margins and a triple in the shares during his tenure. Near-term debt redemption issues are minimal and well-covered by cash flow. 

    Target Valuation: 50-100%+ Upside vs. 20% Downside
    My base case target valuation is based on ~6x ’21 EBITDA (burdened by SBC and excluding CAF II income) of $8.6bn which implies a share price of ~$17 + $1.75 of interim dividends for 50% upside and an ~28% IRR. My bull case is 6.6x 2021 EBITDA (burdened by SBC and excluding CAF II income) of $9bn for a share price of $24 + $1.75 of interim dividends for 100% upside and a 50% IRR. My bear case is 5.3x $8.2bn of 2021 EBITDA (burdened by SBC and excluding CAF II income) for a share price of $8 + dividends for ~20% downside. 

    Key Thesis Points 
    #1: Conduit-based fiber footprint is best-in-class and nearly impossible to duplicate (>$50bn of gross PP&E). 
    CTL has 450k route miles of fiber, 37.5k miles of subsea fiber, 16k miles of conduit, >150k on-net fiber buildings. AT&T, Verizon, Comcast, and Zayo have 1.1mm, 520k, 145k, and 113k route miles of fiber, respectively. Building a fiber network in a high density metropolitan area is difficult – requires significant permitting, similar to tower businesses; however, once “on-net”, a building delivers revenues at high incremental margins; CTL’s conduit-based network is an important advantage. 

    #2: New CTL is the #2 player for business end-market and a likely long-term share gainer 
    Combining Legacy CTL and Legacy LVLT’s sizable commercial businesses results in the #2 enterprise connectivity provider after AT&T and ahead of Verizon. AT&T and Verizon represent ~50% of commercial wireline market and are steady share donors. Their networks are predominantly copper and management is not investing heavily in the commercial market. Combining Legacy CTL and LVLT network allows for both an improved value proposition to customers as well as a better cost structure with more buildings “on-net” in the combined network. Further, without having to pay other providers (“off-net”), not only is there a large cost opportunity in network access costs, new CTL can price business and compete more effectively. 
    “Our chances of winning go up a fair bit more, because on any given bid, we can serve more locations on-net than each of the companies could on a standalone basis. And the more locations you serve on-net, meaning the less you have to rely on your competitors to win the business, which is always a good thing” – JPM Conf, 5/16/18 
    Additionally, given their newly combined scale, CTL has found they are invited and able to bid more competitively on larger business. Given the longer sales cycle of large enterprise deals, there could be a lag before this benefit begins to take hold. 
    “We see that as the second largest in wireline, enterprise business, we use that to fight at Level 3. We had to fight to be included in the competition. Now, we're automatically included in the competition, so that gives us greater opportunities to win business from customers.” – GS Conf., 9/12/18
    “Given the scale and the size of the combined company, we're now seeing interest from customers being invited to the table for larger deals which we view as a positive” – JPM Conf. 5/16/18

    Customers also believe CTL is more likely to invest in their network than AT&T and Verizon who are distracted by other businesses (5G build-out, entertainment). The business market is ~75% of revenue for CTL vs. teens for AT&T and Verizon. 

    "To industry consolidation point, now that we are the second largest provider, it'd be tough to someone who is soon to invite CenturyLink to look at this, because chances are with our connectivity fabric, we can probably give them a sharper offer than anyone else. And more importantly, as they change from where they are to where they want to go, we actually are willing to put the capital to work to establish a new connectivity fabric and willing to spend the capital, which is a very different situation from what our competitors are facing with huge demands on 5G infrastructure, huge debt loads for media purchases and so on and so forth. So I think that that really helps us.” – BAML Conference 9/6/18
    Competition from cable is on the much lower end of commercial end-market. Legacy LVLT previously gave disclosure that 75%+ of North America CNS revenue was from customers paying >$10k/mo vs. cable companies serving <$2k/mo ARPU customers, and often much lower. It's more likely that the integrated CTL sales infrastructure with larger on-net footprint is able to more aggressively pursue the cable companies’ lower end SMB market than the reverse. 

    #3: Execution on integration has been strong – shares have declined as estimates have gone up. 
    Management initially guided to achieving 80% of $850mm opex synergy target over 3 years; instead they hit the full amount within a year. In tandem with the synergy outperformance, management increased initial 2018 EBITDA guidance ~3% during the year and beat the high end of initial guidance. Subsequent to achieving the synergies 2+ years ahead of schedule, management introduced an incremental $800-1bn “transformational” savings target. While management is guiding for these to scale linearly over ~3 years, and current guidance only considers such, their track record indicates they are being highly conservative. 

    #4: Cost opportunity is large enough to drive EBITDA growth; consensus expectations are skeptical. 
    Despite delivering on synergy targets and raising guidance, consensus expects flat EBITDA. At the initial time of deal, management guided to 500-700bps of EBITDA margin expansion opportunity; in the first year, they’ve gone from 36% to 38%. Additionally, management has consistently spoken to the company being capable of consistent EBITDA growth. 
    “I think when I am sitting here saying, I look out the next five years and we should generally be able to grow EBITDA every year, that sums up a lot.” – BAML Conf, 9/6/18
    “Clearly the driver for EBITDA growth in the short-term is driven by the cost savings and there is plenty next year. I don't think there's any air pockets if anyone is thinking that. But over time, as you narrow the revenue declines, and make that grow the total revenues of the company, it transitions well. So the summary I would say is we're an EBITDA growth company. I think that's the bottom-line, and you can have your views on it, but that's we firmly believe in that and that's what you'll see out of us” – BAML Conf., 9/6/18 
    While investors reasonably fear that increasing EBITDA margins through synergies on declining revenues eventually hits a wall, expenses appear deflationary as well. In 2017 and 2018, excluding the benefit of synergies, expenses fell at ~60% the rate that revenues declined, with an improving trajectory in 2018. 

    #5: Transformation efforts may drive growth/stem revenue declines after front-loading some lower or no-margin revenue pressures. CTL has experienced significant “voluntary” revenue pressure from self-inflected actions to move away from low-margin/unprofitable business that will fade away post 2018. New management has reset a number of unprofitable contracts and walked away from unprofitable Prism video business. Some reports suggest Prism revenue is down ~50% in 2018, this alone could be as much as an ~300bps consolidated revenue headwind. Additionally, moving away from low-margin to unprofitable CPE sales and individual contracts are also impacting revenue ($30-40mm quarterly impact disclosed in Q3). As these one-off revenue headwinds fade in 2019, revenue pressures should moderate. 
    Importantly, the next step of cost-saving “transformational” activities are focused on improving the customer experience: 
    “I love telecom, one of the things about it is and I firmly believe this, and I've talked about this for a long time that if you drive costs down, you drive customer experience up” – GS Conf., 9/12/18
    “Most of the things that drive cost in our business, are dissatisfaction points for our customers. We take 40 to 50 million calls every year. And I had our call center people when I came to CenturyLink say hey you know if we could if we could cut this each call by 30 seconds, think how much money that would save. And my answer is, you're looking at the problem wrong.
    I want you to save the 30 seconds figure out how to do that. But how do you make the 40 million or 50 million calls 20 million calls, because these calls are coming to us because the customers are dissatisfied about something whether it's their bill or their modems not working properly or they're calling us about something. How do you reduce those number of calls, if we can do that we drive cost down, we don't have to handle 20 million calls. And we drive customer experience up” – GS Conf., 9/12/18
    “We can continue to upgrade technology to make sure that as we go into a building that we can serve a variety of services. And if a customer calls us, it's a matter of typing in commands to provision service as opposed to doing truck rolls and other things. And so, we'll continue to expand not only the footprint of the network, not only to add new buildings but the fundamental capabilities of the network.” – Q4’18 Call 

    #6: CTL is now being managed by LVLT’s highly capable CEO Jeff Storey. Storey joined LVLT via acquisition as COO and became CEO when LVLT faced integration challenges in 2013. During his tenure at LVLT, EBITDA doubled with margins expanding from 25% to 35%, resulting in share price tripling. Over ~4 years with Storey at the helm, LVLT outperformed synergy expectations and successfully integrated numerous large acquisitions with a focus on enterprise end-markets (shifting enterprise mix from ~55% to 75%+). Additionally, Storey took LVLT from negative FCF to >$1bn

    Key Risks/Bear Case & Related Thoughts 
    This is obviously a hairy, levered situation and I will do my best to address many of the key issues as well as my thoughts on a few mitigants. 

    Significant financial leverage: at 4x leverage, cutting dividend to hasten de-leveraging is likely the right call. Maturities are not imminent; company generates ~$2bn of post-dividend FCF p.a. vs. ~$3.5bn of debt maturing in next 3 years. 

    Synergies run out; secular revenue pressures may not: history of telecom has required managing costs through deflationary technology cycles and loss of legacy revenues. Given large reputational difference in operational capabilities between prior CTL management and new (former LVLT) management, combined with success on initial synergies, opportunity for cost transformation could be larger than appreciated. 
    Competition from cable in business end-markets: cable competes on much lower end of market – average ARPU of <$2k/mo vs. >$10k for CTL. Historically, CTL has not focused heavily on lower end of business market; believes they can compete more aggressively there given scale and cost structure 

    MPLS -> SD-WAN transition: Deflationary pricing from software-defined networking has been a consistent fear. I’m not an engineer so I will provide management’s commentary and acknowledge this is a key point for further diligence. 
    “The question we get a lot is, "well, is 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 are not selling single node networks. We're selling 200, 300, 400 node networks. And when you think about SDWAN, 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 customer's network becomes addressable, your chances of winning goes up. So we think SD-WAN -- any technology has positives and negatives, but net-net, we think, is positive for us from an Enterprise perspective” – UBS Conf., 12/4/18
    5G may displace usage of fiber:
    “I think with 5G, we're excited about the opportunities. We are big, we're obviously the largest provider of long haul fiber in the U.S. We are a substantial provider of metro fiber. You can expect us to be fairly aggressive at trying to win 5G builds or being part of that build up. And so you'll see us play in that market.
    We like it because it extends our fiber in the metro. We think that business in itself should be profitable for us, but in addition we get to extend our network to both take down cost and extend our addressable market within any city. So, I think you can expect us to be pretty aggressive on that front. And especially where we are the local phone company, we should be able to do quite well. We already have a lot of fiber and we can extend fiber easier than somebody trying to do from scratch. So, I think we have advantages in quite a few markets, and even the Level 3 fiber footprint in urban areas has been pretty strong. So I think that – together that's an advantage.” – BAML Conf., 9/6/18
    “Wireless means exactly what the word implies, which is just a little less wire. Communications wants to get to glass (fiber) as quickly as it possibly can” – Oct. ’16 Deal Call 
    “The world talks about wireless and everything is going wireless, but it's – and it's not even in the last mile anymore. It's the last hundred feet that are wireless.” – GS Conf., 9/12/18

    CFO Change: He did leave for a larger scale integration opportunity (T-Mobile + Sprint), but this is certainly alarming. Sunit Patel was a critical part of the team (along with Storey) that delivered Legacy LVLT’s strong integration track record. This is certainly a point worth further investigation. 

    Key Modeling Considerations/Assumptions Behind Target Valuation: 
    Base Case: ~1% EBITDA growth primarily driven by cost saves; trade at 6x EBITDA. Blended multiple based on 5.25x for legacy CTL, 7x for legacy LVLT. In this scenario, steady EBITDA + de-leveraging sub 3.5x likely leaves the implied fully-taxed FCF yield (14%) too high; could argue for higher multiple. 
    Bull Case: LSD EBITDA growth primarily driven by cost saves; trade at 6.5x EBITDA; shares traded above this multiple recently. Blended multiple based on 5.5x legacy CTL, 8x for legacy LVLT. This 2021 EBITDA is more conservative than simply taking 2019 and adding stated synergies/transformation benefit (flat revenue). 
    Bear Case: Accelerating EBITDA declines (synergies fail to offset revenue pressures); trade at ~5x EBITDA (blend of 4.5x and 6.5x) . 
    Additionally, to sanity check the multiples, I ran two simple DCF’s: 
    One could argue for a wide range of WACC’s given the leverage as well as the combination of a low beta, but high cash flow/equity yield; I used PV8-9. 
    Run-off DCF: PV8-9 imply 6.2x and 5.5x EBITDA, respectively. EBITDA holds flat for 2 years driven by cost saves, but declines essentially into perpetuity with EBITDA margins bottoming in the low-30’s; capital intensity declines from 16% to 10% over time as management realizes this is a run-off business. 
    Modest EBITDA Growth: PV8-9 imply 6.7x and 7.6x EBITDA, respectively. EBITDA grows 1-2% for ~10 years before fading down to a terminal low 30’s EBITDA margin. Capital intensity remains 100-200bps higher than run-off case, but does decline as business begins to decline. 

    Other Key Analytical Considerations:
    I include $3.2bn of tax-affected pension and retiree healthcare liabilities in Adj. EV. I also include ~$1.5bn of federal NOL’s at PV8 based on $7.3bn of federal NOL’s. While legacy LVLT traded at >10x EBITDA, we must acknowledge that there was superior top-line growth (and higher expectations) at the time. Additionally, Frontier is a comp for parts of Legacy CTL and trades <5x EBITDA; however, Frontier has more exposure to copper infrastructure and consumer business which faces more aggressive challenges from cable.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Beat/raise EBITDA guide on back of transformation benefits through-out year and fading of voluntary revenue headwinds. Management has history of guiding synergies extremely conservatively (see above discussion). 
    Enterprise shows consistent revenue growth
    Continued expense management beyond synergies 

    Management have indicated they are open to considering value-creating strategic alternatives for consumer business: 
    “Really you're asking, are we willing to divest the Consumer Business, which we look at it. The answer is, of course. In fact, if you look at our data center sale a couple years ago, you see we asked the same question about various parts of our business. So, we are continually looking at the businesses we're in and saying, what should we do with them, how should we operate them, how well are we executing?
    If you look at the Consumer business, it's only 25% of our revenue. And we are clearly targeting Enterprise customers for our growth and as the fundamental part of our business. And so, it always makes sense to look at it, but we look at it through the lens of, how do we generate the best return for shareholders? And in some cases, that's continue to operate those businesses and some cases it might be to do something else. And that is the lens that we'll look at it through, is how do we – we're not married to the business. We don't feel that we have to be in it, but how do we best return value to shareholders?” Q4’18 Call 

    Large shareholders (Southeastern, ~6% shareholder) have advocated for separation or tracking stock creation: Temasek also owns ~9% of shares. 
    Zayo, which also owns fiber assets, has seen activist involvement as well as Private Equity interest
    However, management recently put in place a poison pill to prevent change of control provision that would cause CTL to lose NOL’s. 

     

    Messages


    SubjectBear Case
    Entry05/11/2019 06:16 PM
    Membermwmg113

    Thanks for the comprehensive write-up. I have looked at CTL a few times and want to like it, but even at $10 it still looks difficult to me given the combination of high leverage and continued low-mid single digit revenue declines. While somewhat difficult to quantify, it seems like even if you give management credit for the various factors they say are pressuring revenue, the core business ex-Consumer is still declining at a 2-4% rate. Part of the issue is clearly that they - just like T and VZ - still have lots of legacy voice and price-sensitive transit business which are declining at 8%+; given the apparent absence of really powerful growth in the more attractive parts of the business (e.g. dark fiber / pure HSD connectivity services) this will drag on for a decade or more before the effect on overall revenue really starts to attenuate. Their business line disclosures reveal that essentially nothing is growing other than enterprise and SMB IP & Data services, but only at 1-2% and these are less than 20% of total revenues.

    I do not believe management's claim that they can grow EBITDA for the next 5 years (as a side note, I think Sunit Patel was the one who made that claim and then took another job like 2 weeks later, so he won't have to face the music if/when that doesn't materialize). As you suggest, this is a very high fixed cost business where a high degree of the expenses are related to network spend and are necessary whether the infrastrucutre is utilized or not. If you assume revenue declines at 3% for the next 3 years, it implies management will have to find another $2 billion of cost savings just to keep EBITDA flat - cutting another 15% of cash costs just seems difficult for a business like this especially after they've extracted all the merger synergies. 

    There is a ton of debt maturing in 2021-2023 (c.$12bn) with 5-6% coupons. I think they'll be ok refinancing these if they are going to market at only 3x leverage - even if EBITDA is declining at that point I would think creditors would feel fairly covered creating the enterprise at 3x EBITDA. 

    Nevertheless, I'm not sure how much equity value there is in 3 years even if EBITDA stays flat. They're only paying $100m of cash taxes today and I think generating something like $2bn of run-rate GAAP net income - this means the NOL will likely be gone inside of 5 years which represents a hit of c.$500m of taxes and results in $2.5bn of fully-taxed equity FCF. What multiple will people really put on a high fixed-cost business with reasonably high leverage and invariable top-line declines? 

    They will have about 1.1bn shares in 3 years, so at 5x FCF / share of $2.30, the stock is worth $11.50 or so plus you got $3 of dividends along the way which is a 10% IRR or so. I think this is about the best case scenario. 

    Given the leverage, the upside is obviously explosive if the equity re-rates, but I don't see why it would. What does CTL really do better than anyone else? Guys like Cogent are crushing them on transit where pricing continues to decline at 20%. Cogent and several of the cable operators are also aggressively growing share in the SMB market where people value simplicity, speed, and service. These are not CTL's strong suits. CTL relies on up-selling into multiple services - CCOI and many others do not have any legacy revenues to defend.

    Management's pitch is that VZ and T aren't paying attention to their business services segments. This sounds very compelling but I don't think it's really true. Look at T's business wireline segment - they are growing IP and managed services at 5%. CTL doesn't seem to have anything growing at 5%. VZ is working on expanding its fiber network basically everywhere, including 60+ new markets in which it doesn't have a presence. No question they will try and attach business services revenue onto their expanded network and will probably price it aggressively. 

    There is a real case to be made that CTL's Business segment is actually deteriorating and losing market share. If top-line is declining at a 4-5% rate in a few years I think the downside from here is far greater than 20%. I know they are reviewing strategic options for the Consumer business, but I suspect this business generates a surprisingly high amount of their FCF given that they are admittedly running it for cash. Assume an EBITDA - CapEx margin of 15% on the Business segment - this suggests $2.6bn of unlev. FCF or only about 50% of total CTL unlev. FCF despite the business being 75%+ of total revenues. Even if they get $10bn of value for Consumer it would probably be leverage neutral at best and would require an elimination of the dividend given dramatically reduced FCF base. 


    SubjectRe: Bear Case
    Entry05/11/2019 09:32 PM
    Membersidhardt1105

    Thanks for posting the bear case.  You wrote:

    "Nevertheless, I'm not sure how much equity value there is in 3 years even if EBITDA stays flat. They're only paying $100m of cash taxes today and I think generating something like $2bn of run-rate GAAP net income - this means the NOL will likely be gone inside of 5 years which represents a hit of c.$500m of taxes and results in $2.5bn of fully-taxed equity FCF. What multiple will people really put on a high fixed-cost business with reasonably high leverage and invariable top-line declines? 

    They will have about 1.1bn shares in 3 years, so at 5x FCF / share of $2.30, the stock is worth $11.50 or so plus you got $3 of dividends along the way which is a 10% IRR or so. I think this is about the best case scenario. 

    My response (If I may inject) is I do feel, given the choice management has made to focus on debt pay down that we should give them credit for it.  It seems you are assuming $3 billion of free cash flow and subtracting $500 million for taxes as the NOL is burned off.  Well, even in that flat EBITDA scenario, after three years of paying down ~$2 billion/year (I think its $2.2 billion) of 5.5% coupon debt, your FCF should be up by $350 million/year or 35c per share.  So your $2.30 is actually more like  $2.65.  2.65 x *(your meager) 5x multiple  = $13.25 + $3 of dividends = $16.25.  At a 12.5% free cash flow yield the exit price is $21.20 and the IRR is 33%.

    Obviously the more important question is, "What is EBITDA in 3 years?"  What is difficult about this investment is management is telling us several thing and we know several things.

    1.  Some of the revenue is not profitable and is being abandoned at flat margins or even negative margins.

    2.  Some of the revenue is immensely profitable, such as legacy voice.

    3.  Some of revenue declines come with commensurate or similar expense declines, and are thus close to EBITDA neutral

    4.  Some of the new services come with much higher margins such as SD-WAN.  So revenue declines can actually mean EBITDA margin expansion.

    5.  Legacy Centurytel (lets call it what it was) was not well run.  Level3 Mgmt (even without Patel) should have significant opportunities here for years to come.

    The bears are all beared up given the scenarious around FTR and WIN which are not really apples to apples comparisons.  FTR ran into trouble right out of the box with their CTF aquisition and could not even maintain EBITDA let alone grow it in the face of declines revenues.  FTR has consistently missed expectations while CTL/Level3 mgmt has consistently beat expectations.  FTR also has a very different leverage situation (4.75x versus 3.9x) and is focused on consumer with much weaker enterprise trends than CTL.  WIN had its issues but filed Ch11 due to losing the lawsuit rather than the business issues (at the moment).  WIN was a crap shoot in a couple years but had green shoots in the business with growing broadband subscribers and the interconnect cost takeouts.  CTL is getting painted with this same brush just as Level3's closest comp (ZAYO) is being taken out at a rich multiple that would imply a much higher stock price for CTL (call it $5 or $6 higher).

    What does concern me is that CTL management is not implementing a stock repurchase plan.  If I was them, I would eliminate the dividend and spend 3 years worth of dividends ($3.3 billion) on a dutch auction at $13.50 to $14.

    Strategic options for consumer are actually pretty interesting gievn WIN is in Capter 11 and FTR is on the verge.  They could combine their business with one of these or both, embark on a new round of cost cuts, and circle the wagons.  In the least divesting this unit (for a unconsolidated minority equity interest) would change the order of magnitude of the top line decline as you get rid of residential voice and video.

    Finally, I believe the old dividend was stupid capital allocation policy given the opportunities and risks in telecom today and CTL's existing leverage.  Mgmt should be applauded for changing it. The potential value of CTL has gone up not down as a result.

     

     

     

     

     

     

     

     


    SubjectRe: Re: Bear Case
    Entry05/11/2019 11:22 PM
    Membermwmg113

    Fair point about giving them credit for debt paydown / reduced interest expense but my feeling is that they will be paying higher rates as they refinance which will at least in part offset the reduced quantum. Totally agree that the dividend cut was a necessary and sensible measure. 

    Management has done a good job at reducing expenses post-merger but I think the reason the stock has continued to crater is really a function of disappointing revenue trends. There was a view at the time they merged with LVLT that the combination would help improve pricing and also create significant revenue synergies -  neither of these things have materialized. I take the point about management intentionally letting some unprofitable contracts roll-off and halting sales of some CPE equipment and Prism etc. but it's not like management is saying the underlying business is growing if you exclude these factors. Clearly the business is declining at a meaningful rate even if you exclude the impact of these specific actions.

    I don't think the Zayo M&A comp is relevant on a headline basis as Zayo had some modest overall organic revenue growth (much less CLEC business than CTL), and the real value was in their dark fiber business, which is not a big driver for CTL though they do some dark fiber. 

    Arresting top-line declines is critical for this business - as with any equity most of the value resides in the value of the business 5-20 years out rather than the first 5. If this is a business where revenue declines low single digits for 10+ years then there is not much terminal value here as the operating leverage will bite. Can CTL gain enough market share to offset the natural pricing headwinds that exist across the industry and the run-off of its large base of CLEC revenue? I think that's what everyone is trying to figure out now. Until it becomes clear that CTL can jumpstart revenue I think there is basically no FCF multiple that is too low. 


    SubjectRe: Re: Re: Bear Case
    Entry05/12/2019 05:01 PM
    Membersidhardt1105

    I think your rebuttal "but my feeling is that they will be paying higher rates as they refinance which will at least in part offset the reduced quantum" is unreasonable given we are discussing a scenario where 1) EBITDA remains constant and 2) the leverage ratio will have declined from 3.9x to 3.25x.  It is most likely that (ceteris paribus) their cost of debt will be lower.

    If EBITDA does decline, then yes, lenders will be more cautious, But that is not the experience so far at Story led Centurylink/Level3, nor is it what they are leading us to expect.    Management has been very forthright in prediciting "significant revenue declines", confident in prediciting EBITDA growth, and in the long term sanguine about growing Enterprise revenues.

    Jeff Story on the Q4 2018 conf call held in Feb 2019:

    Neel will give you the details on our outlook for 2019. But again, I'm excited about the future of our business. Over time, we see the opportunity to improve the revenue -- trajectory of our business markets revenue. Our 2018 financial guidance -- excuse me, performance gives us confidence in our ability to grow adjusted EBITDA and generate strong free cash flow even in the face of significant legacy revenue declines. 

    There is no surprise here.  He didn't say "modest" legacy revenue declines; he said "significant legacy revenue declines".  In the same sentence he also said "confidence in our ability to grow EBITDA" and "opportunity to improve revenue trajectory".

    The only thing things that have changed since CTL has fell by 1/3 are 1) The capital allocation policy has been shifted to reduce the volatility of the equity value and to create financial flexibility which could potentially be used to create shareholder value (thorugh M&A or buybacks) and 2) the stock price is lower.

     


    SubjectRe: Re: Re: Re: Bear Case
    Entry05/12/2019 08:23 PM
    Membermwmg113

    I guess what I really can’t get comfortable with is what will actually drive growth in this business - where do you think is the opportunity? They have been getting low single digit growth in some slices of their pure IP offering but this seems to be below market. Hard to imagine transit turning a corner given pricing dynamics and legacy voice is obviously a melting ice cube. Cable and CCOI are expanding quite aggressively into SMB and I think AT&T and Verizon are as competitive as ever in the enterprise space (particularly the latter given expansion plans, which is really being driven by their broader 5g philosophy).

    I first looked at this as a long with the simple thought that at some point in the intermediate term, the growth businesses would outpace the legacy stuff and revenue would inflect positively. I was disappointed to find that there is basically nothing within CTL that is growing at a strong rate - you would think they would have found a way to present a growth business if they had one when they resegmented. 

    I do not have the same faith in Storey’s words that you do. What is he supposed to say? That he sees no opportunity to drive revenue growth and that CTL is doomed to inexorable revenue declines? I’m sure he does see an opportunity to grow revenue but I think the price of failing at that task is very expensive and creates an unappealing risk / reward, at least for my money. 


    SubjectRe: Re: Re: Re: Re: Bear Case
    Entry05/15/2019 10:27 PM
    Membersidhardt1105

    "But we're also seeing there's a large opportunity in SMB, in our on-net building footprint. So if you think about legacy Level 3, now we're focused on the SMB business. And there's a large building footprint there that we can tap into. So we see a lot of opportunities in SMB in general."- Indraneel Dev (CFO at JP MOrgan Conference May 2019).

     

    Like Jeff mentioned on the earnings call, we added about 4,500 [indiscernible] on net buildings just in first quarter alone. So we're investing in our customers and we think we are taking share.

    Philip A. Cusick JP Morgan Chase & Co, Research Division – MD and Senior Analyst

    So you added 4,500 buildings, but you have a huge number of buildings with fiber in them today where penetration has been strictly fairly low. Is that fair?

    Indraneel Dev CenturyLink, Inc. – Executive VP & CFO

    So I think penetration has been high in certain customer groups. So if you think about -- a lot of the buildings we add for our for large enterprise, and in some cases, some of the lower end of the buildings we add for SMB. So there is an opportunity to kind of improve penetration across all the channels. So we might have added a building for large enterprise like, for example, legacy Level 3, but never sold SMB customers into that building. Now we have an opportunity to sell into all the SMB customers. So we typically have a handful of customers in every building, but there's an opportunity to drive up penetration given the addressable market in that building.

     

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