Good day ladies and gentlemen, and welcome to CenturyLink's Third Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Tony Davis, Vice President of Investor Relations. Mr. Davis, you may begin.

Thank you, Saeed. Good afternoon, everyone, and welcome to our call today to discuss CenturyLink's third quarter 2013 results released earlier this afternoon. The slide presentation we will be reviewing during the prepared remarks portion of today's call is available in the Investor Relations section of our corporate website at ir.centurylink.com. At the conclusion of our prepared remarks today, we will open the call for Q&A. On Slide 2, you will find our Safe Harbor language. We will be making certain forward-looking statements today, particularly as they pertain to guidance for fourth quarter 2013 and other outlooks in our business. We ask that you review our disclosure found on this slide as well as in our press release and in our SEC filings, which describe factors that could cause our actual results to differ materially from those projected by us and our forward-looking statements. We ask that you also note that our earnings release issued earlier this afternoon and the slide presentation and remarks made during this call contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available in our earnings release and on our website at www.centurylink.com. Now turning to Slide 3. Your host for today's call is Glen Post, Chief Executive Officer and President of CenturyLink. Joining Glen today will be Stewart Ewing, CenturyLink's Chief Financial Officer; and also available during the question-and-answer period of today's call will be Karen Puckett, CenturyLink's Chief Operating Officer; Bill Cheek, President of our Wholesale Operations, and Jeff Von Deylen, President of Savvis. Our call today will be available for telephone replay through November 13, 2013, and the webcast replay through November 27, 2013. Anyone listening to a taped or webcast replay or reading a written transcript of this call should note that all information presented is current only as of November 6, 2013 and should be considered valid only as of this date, regardless of the date heard or viewed. As we move to Slide 4, I’ll now turn the call over to your host today, Glen Post. Glen?

Thank you, Tony. Good afternoon everyone and thank you for joining us today. First, I would like to take a moment to acknowledge the hard work and dedication of our employees in the Northern Colorado region. During the worst of the flooding that occurred during September we got thousands of customers experienced service outages among, of course, other hardships. Our local field operations team worked around the clock and managed unprecedented workloads for several weeks and we brought resources from around the states and country into the Front Range areas to support our local teams and they did, they all did an amazing job restoring service to our customers there. So (inaudible) including our employees who have been partially impacted by that event. Turning to slide five, we are pleased with our financial results for the third quarter. We continue to make good progress on number of fronts. We believe our investments and our key strategic growth initiatives continue to strengthen our overall product portfolio which further position CenturyLink as a leading integrated provider of global network, data hosting and cloud solutions. I want to address a couple of significant special items that affected our financial results for the quarter. First, as you saw in the release, we booked $1.1 billion non-cash goodwill impairment in the quarter. The impairment was related to goodwill assigned to the data hosting segment and it was primarily due to our recent performance impacted into the development of growth projections used for calculating impairment. We are not satisfied with our recent results in this segment of our business and we will be taking aggressive step to drive the revenue growth and margin. Margins in this segment to be more in line with industry growth rates are going forward. Certainly, we have reached tentative agreement on…

Thank you, Glen. I will spend the next few minutes reviewing the financial highlights from the third quarter and then conclude my remarks with an overview of the fourth quarter guidance, we included in our earnings release issued earlier this afternoon. Turning to slide 12, on a GAAP basis, we reported a net loss of $1.05 billion and a loss per share of $0.76, primarily driven by the two special items, Glen mentioned earlier that were disclosed in our press release. With the remainder of my comments, I'll be reviewing the results excluding special items as outlined in the earnings release and associated financial schedules. As you can see, we generated solid operating revenues and cash flows in the quarter. Operating revenues were $4.52 billion on a consolidated basis or 1.2% decline from third quarter 2012 operating revenues. Our core revenues defined as strategic revenues plus legacy revenues were $4.1 billion for third quarter, a decline of 1% from the year-ago period. Our strategic revenues grew 4.2% year-over-year and now represent 49% of our total revenues. Strength in the strategic products such as high-speed Internet and high-bandwidth data services, Prism TV and managed hosting services continues to drive this growth. Third quarter 2013 cash expenses increased 1.4% from the year-ago period, driven primarily by higher professional fees and non-employee costs which offset lower personnel related cost. Included in third quarter expense was less than $5 million related to the Colorado floods, Glen mentioned earlier. We've also incurred less than $10 million of flood-related expense during the month of October. We generated strong operating cash flow of approximately $1.81 billion for the third quarter and achieved an operating cash flow margin of 40%. As we move toward revenue stability, we do expect continued pressure on operating cash flow as the revenue…

Thank you, sir. (Operator Instructions) And our first question comes from David Barden from Bank of America.

Hey, guys. Thanks for taking the questions. I guess my first question, if you could go into what you might imagine lots more detail about what's going on in the data center business? I think two things. One is on the write-down. Clearly there's some amount of growth rate in the future that you don't think you are going to achieve that you thought you are going to achieve. So if you can address what the difference in that growth rate is? And then second, on the kind of quarter-to-quarter performance, it looks like the managed hosting business went down $5 million. If you could talk about some of these credits and other things that occurred and I think, Glen, you mentioned that the data hosting business should grow half over half but it could still go down next quarter and grow half over half? So if you guys could give us little bit more sense as to what the expectation here because last quarter we were still expecting this business to grow single digit, so seems like something kind of really went off the rails in the quarter? On the other side of the coin, Stewart, the midpoint of the revenue guidance is actually the highest revenue that you guys would've had pretty much for the whole year. And you guys have been talking down revenue growth expectations I think in terms of 2014. But it feels like we are finding some kind of level, so if you could talk about even with the data center business not performing, it does feel like we are flattening out on the revenue curve and could you kind of revisit what the puts and takes are for getting to revenue growth in reaching 2014? Thanks.

Hey, Dave, this is Glen. And I will see if I could guess it kind of on a couple of items. But -- I will get to your question about that quarter -- in the fourth quarter, we do expect growth. It won’t be negative is our expectation. Anyway, we expect to see growth in the fourth quarter, sequential growth in the 2.5%, 3% range is our target for the fourth quarter. But the -- if you look at this past quarter, we have a number of one-time items. Firstly, we had a currency issue of little under $2 million. We had about a $2 million. We had couple of prior year adjustments in there around $3 million. The big item really was the churn of the old Qwest center where we had some very large customers who were peer colo customers, some very large that we know the names but I won’t call it. But who took their business to their internal data centers. They had very large, both had huge amount of data out there. So that’s the bigger, they worked in any cloud and managed services for almost peer colos. So that’s where a lot of the churn that came from, plus we had a bankruptcy of Kodak impacted us for about $3 million. So it was a combination of things in the quarter. We do expect to turn that growth around. I’m confident that that we can drive growth. In the hosting business, we are seeing significant success in our cost selling efforts. We changed our go-to market with our network customers, are seeing really strong demand. Our sales, as we’ve talked about continued strong and into the fourth quarter. For the last three quarters, it will get strong. Bookings -- data hosting assets are really important for our future growth. They support analyst of course, industry analyst regarding trends, trends toward RTL outsourcing. We believe those are real. We’ve some work to do. We are making some changes in some of our go-to market work and are focused on certain verticals. And so strategically these are very important assets for us and we see this is where the marketplace is going over time and I’m confident we can grow this business. I will let Jeff make a few comments on this year.

Sure. David, Jeff Von Deylen. As we went during the quarter, kind of expected Q3 would be flat to Q2. In Q2, there was some non-recurring revenue. But anyway, we got surprised by the $5 million. I think Glen talked about that. From a new sales perspective, we were in line with new sales really – we had the same level of new sales in Q3 as we did in Q2. And as Glen mentioned, probably the biggest success we're having is selling into some of the CenturyLink network customers who do hosting today so they're not part of that Legacy Qwest hosting base but they're buying the new products. So we really think the combination of some of these one-time items are getting behind us after the third quarter. It's why we think the 2.5% to 3% total hosting growth is reasonable. And that's the result of the sales. I will say the quarter's impact has also negatively impacted our network, our other network as we call it, or the wide area. The VPN network was negative year-over-year. If you sort of take that out and just focus on the hosting revenue kind of year-over-year without the credits, we're about 8.6% growth. So a little better than kind of that reported 4% but – and we feel like going forward some of these one-time credits are out of the way and we're poised to grow sequentially. On the question on the goodwill write-down and sort of how we think about that. Stewart, do you want to take that one on the future growth rate?

So in terms of the goodwill, David, we – just basically of our past performance, we decided we needed to take down the, just from an accounting standpoint, take down the assumed growth rates that we're using going forward for purposes of calculating the value of the business and comparing that with the amount that just flows and just decided that we needed to go ahead and write it down. I mean we certainly believe, as Glen pointed out in the value of this business going forward, we believe that we can get the growth rates that will – and if you look at market comps basically, there's more value there than we wrote it down to really. So we're comfortable with that. I think we're conservative in the write-down and we're conservative in the projections that we used to calculate that. Your question concerning the revenue guidance and it feels like we're getting – finding some level of flattening revenue curve. So basically yes, we are continuing to get towards and move towards flat revenue. It's a little slower than we thought it would be a few quarters ago. And that's why we said last quarter we didn't think we'd get a flat revenue in '14. But basically it's dependent on the continued growth and strategic revenue. The data hosting business is a big part of that. IPTV revenue and success there that we're seeing is a big part of that. And continued success in our business sector, with the MPLS revenue that we're driving there and the new customer growth we're driving there, we're having some really good success there. And if we can bring the success that we're seeing in the large customer segment, large enterprise customer segment down to the small and mid-sized segments will help us to get there quicker. The other place is basically just our high speed Internet. We need to continue to do well from the standpoint of adding customers and hopefully increasing rates a little bit over time as we were able to do in the third quarter.

Okay. And just a follow-up quick, when you're looking for the data 2% to 3% growth, is that year-over-year or sequential?

Sequential.

Okay. Thanks a lot.

Thank you. And our next question comes from Simon Flannery from Morgan Stanley.

Okay. Thanks very much. Could you dig a little bit more into the broadband numbers? You have very nice snap back. Obviously some of that was seasonality. But did you change or go to market with that driven by promotions. Is this also a level that we think is sustainable over the next couple of quarters? And capital intensity continues to move up into the mid to high teens. As the fiber-to-the-tower build slows, when do you think we'll sort of see a peak in that capital intensity, or are we seeing it right now or we are going to maintain it for another year or so? Thanks.

Hi. This is Karen Puckett. In terms of the broadband bounce back, we are pleased about that obviously. I would say no new go-to-market. We continue to execute and we do this well and so the seasonality helped. Also we were able to overcome the indirect partner we spoke about last time with some digital partners that we had helping them increase their business and our call center channel performed very well, as well as it’s getting very focused on our go-to-market in terms of our prospect leads and making sure that those are all optimized. So the things that we normally do we continue to do well and have a good quarter from that.

Yeah. Simon, regarding the capital budged. We expect CapEx -- even though we do expect on the top of the tower spend to go down. We believe we will -- our budget will stay in the range in the $3 billion range that we are talking about. It can be a little plus or minus either side of that, but that’s the range we expect it to be and because video uptick we think we have a broadband expansion driving additional revenue opportunities. Also one of its success based, yeah, third of our, about a third of our budget will be success based capital. So we continue to be successful in even at NPLS working and the Savvis sales, data center expansion and a lot of that will be success based. So we expect to be in this range, in this $3 billion range we expect for 2014.

Thank you. And our next question comes from Batya Levi from UBS.

Great. Thanks. First a follow up question on the data hosting business. I think couple of months ago you had mentioned that we will see some pick up in churn in the first quarter of ’14, would the churn that we saw in the quarter, was that pulled forward or do you expect another pick up in churns in the beginning of the year? And the second question is on the business revenues, we saw some slight improvements year-over-year growth in that business? Do you expect that to continue? Thanks.

It’s Jeff. Regarding to churn, the $2 million that we referenced on legacy Qwest that was a surprise, so that was sort of over and above what we had forecasted, so and we don’t have kind of current view of Q1 -- Q4, Q1 any more large churn, any higher than kind of where we currently run, so that $2 million that we reference, we are going to reference in this quarter was over and above what we expected. But then as we go forward to Q4, Q1 we sort of expect to have sort of that a normal level of up churn which we currently run in the 1.3% to 1.5% of revenue.

And Batya, on the business revenue growth, I mean, we do hope to continue to improve our business revenue growth, somewhere in the third quarter related to some price increases that we did, but small amount of it. But we are again seeing good success on the large multi-node NPLs networks and strategic data revenue growth that we are seeing in our business sector.

Okay. Thanks.

Thank you. And our next question comes from Scott Goldman from Goldman Sachs.

Hey. Thanks. Good afternoon, guys. I guess I want to follow up on David’s question earlier and just looking at the 4Q guide that you’ve laid out for really from both revenue and for EBITDA, if you kind of look where you came in 3Q, fairly close to the mid-point of your guide there, but which is though you are bringing down full year guide by about 50 million or so at the mid-point for both revenue and EBITDA, if we take your 4Q numbers there. So I am wondering if you could just talk a little bit about the puts and takes that we should be thinking about, I know, you highlighted CPE? But anything else we should be thinking about, Stewart, as we go forward on that? And then, secondly, obviously seeing good results on Prism IPTV and market expansion and the quality churn implications in HFI tax rates as you get there? Just wondering how you think about the opportunity to maybe accelerate that either within adjusting CapEx budget or even a willingness to move CapEx little bit higher just given the benefits of that product?

Yeah. So, Scott, in terms of fourth quarter guidance, I mean, considering the guidance that we have for full year and the performance in the third quarter and our guidance that we gave in fourth quarter, we will probably be somewhere around the midpoint to the lower end of the guidance that we gave for revenue and operating cash flow for the full year. So yes, to the midpoint or slightly below. We feel good about that. There are some – we do expect an increase in our CPE sales in the fourth quarter and the associated costs with that since that’s a low margin product.

In terms of Prism –

Yes, just to talk about Prism, we build out in markets where we are, we sell and other phases going in Phoenix and Colorado Springs, as well as Omaha, and other areas, we are building it, and you build out in those markets. As we continue to see success, as the growth continues we will consider expanding to other markets, that will be part of our 2014 budget processes. We are in a process of going through now and we will be considering those expansion, as far as increasing the budget – we don’t expect significant increases in the budget, capital budget to build out Prism release in 2014. But that is an opportunity for us as we look – we continue to see success here, it’s an opportunity to really consider acceleration to build-out in the months and years ahead.

Just one follow up to the guidance. Anything we should be thinking about in terms of the new union contract, how that layers in, in 4Q and into 2014 that would impact – benefit you on the EBITDA side come 4Q?

Yes, not much impact in the fourth quarter. We should see some margin [ph] little bit in the first quarter and full year 2014.

And our next question comes from Tim Horan from Oppenheimer.

Thanks guys. Two questions. Where do you think your pricing is on the datacenter side versus market and versus legacy, are you seeing kind of much over-build in the markets that you are in, or is it more just the internet companies connecting their own facilities? And then secondly, on the GPON strategy, could you maybe just give a little bit more detail on how it compares and contracts to what kind of Verizon and FIOS and maybe a little bit of color on the cost structure and it seems like a very large opportunity and I know Omaha you had lost a lot of market share historically, maybe if you can give some color on what kind of update you are getting out there?

Sure. First of all, on the data center side, specifically it relates to colocation, I think our lighter fee base, certainly any pricing over the last few years has probably declined in 15% range. So some of those clients that are coming up for renewal, and just pure colocation we have to – we see that in price erosion. You are right that the larger, bigger content, kind of guys that build around data centers and look at choices of where to put their environment and we’ve had that certainly in our numbers, negatively impacted. I will say there are probably couple markets that we think may be more competitive or price competitive than one in terms of DC, Santa Clara and Dallas, but those are markets that we are – it’s good news that we are pretty well distributed and where we are adding footprint is probably away from those markets, where we see some of the wholesalers and other demand going. So yes, the last point is, we’re really trying to take advantage of the better base of customers who – Karen really has a [indiscernible] and our abilities to data center and even colocation, racks and bubbles to those customers that they have never had that offer before when you take that – it really helps us kind of de-emphasize some of the larger one megawatt and above kind of deal, to really have enterprise, smaller opportunities.

And Tim, Karen, on the GPON question, yes, I would say in terms of just Omaha, if you think about that, we had fiber deployed in that core of the network. So it made sense to put GPON in, what we are cutting to do here is really understand the market with the GPON message, take rate and such as well as hardening our process, somewhat of a new process for our systems and our organization. I will tell you that we are very pleased, we have not pitched even hard on the soft launch Omaha, very pleased with the result both from a consumer and business standpoint. So encouraged in every operating metric. The biggest, we have some fiber to the curb technology. So we have the fiber and we decided to use the most recent GPON capability to enable that again to try, to further harden our process and the legacy ceasefire in terms of those systems and processes. Our focus is very targeted in terms of going after the high addressable market and consumer, so they’re premium kind of customers but very focused on the business side too and you will hear more of that in the coming quarters as our focus on GPON with business.

Thank you.

Thank you. And our final question for today comes from Michael Rollins from Citi.

Hi. Thanks for taking the question. I was wondering if you could talk a little bit about what’s going on in the cost base and especially relative to revenue. So it seems like the segments that ruined in the quarter when -- let me phrase it year-over-year they grew like the business segment, data hosting segment. That’s where you actually saw segment income decline year-over-year. And in aggregate, if you just look at the -- just the segment income or even take it to the larger consolidated EBITDA level, it looks like EBITDA was down and more than a dollar year-over-year for every dollar of revenue losses. Stewart, if you can talk to us about how to think about the change in revenue relative to change in the EBITDA whether it can actually get better over time if there any specific issues that were impacting this quarter, more so than usual? Thanks.

Yes, Mike. So what you are saying is a combination of really two major things that are going on. One, we are cycling through or have pretty much cycled through the synergies related to Qwest. So we are not seeing the offsets to expense increases that we have been having really all along related to how network services really and charges related to business customer grow. And some of that was offset in the past related to synergies that we were achieving from Qwest. Also, secondly in the third quarter, we do have some seasonality from a cost standpoint. So we got a chance to do maintenance on our networks and things like that. So that really drives our cost down, some in our power cost to higher in the third quarter simply because of the heat and the cooling required, and things like that. The other is that basically we have new initiatives where we are rolling out new products and their cost associated with that really, that aren’t really -- there's not a lot of revenue benefit there in the early stages in rolling out new products. So I think that you are seeing some of that too. We should -- we would expect for other than the Qwest synergies for the other expenses to be more in line with the revenue growth in the future though.

Thanks.

Thank you. And I’m showing no further questions at this time. I would like to turn the conference back over to Mr. Glen Post for any closing remarks.

Thank you, Saeed. Please turn to Slide 21 as we close today’s call. Overall, we are well pleased with our results for the third quarter. We believe our continued investments in key strategic opportunities will help us drive revenue growth and strong financial results over time. We are seeing strong demand from business customers for our advanced network and hosting IT solutions. And we are seeing -- also seeing improved sales success to increase collaboration among our business and data hosting sales leaders around the joint development of targeted innovative solutions. Our new bundled offers have positioned us to capture additional spend in the IT services space from our customers portfolios. For example, our managed office product is a simple, fully managed bundle solution. It’s created specifically for our small and commercial businesses and integrated all elements on our communications network, managed data, hosted managed voice and managed applications. We believe these types of products and bundles that we are developing can be very effective in driving, future revenue streams and make -- develop a lot of customers loyalty. Overall we believe we are well positioned to effectively compete and drive revenue growth from our strategic products and services in the months and years ahead. Thank you for joining our call today, and we look forward to speaking with you in the weeks ahead.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.