Lumen Technologies, Inc. (LUMN) Q1 2020 Earnings Report, Transcript and Summary

Greetings and welcome to CenturyLink’s First Quarter 2020 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, May 6, 2020. I would now like to turn the conference over to Valerie Finberg, Vice President, Investor Relations. Please, go ahead.

Thank you, France. Good afternoon, everyone, and thank you for joining us for the CenturyLink first quarter 2020 earnings call. Joining me on the call today are Jeff Storey, President and Chief Executive Officer; and Neel Dev, Executive Vice President and Chief Financial Officer. Before we begin, I’ll note that all of our earnings materials can be found on the Investor Relations section of the CenturyLink website. I’ll call your attention to our Safe Harbor statement on slide two of our 1Q ‘20 presentation, which notes that this conference call may include forward-looking statements, subject to certain risks and uncertainties. All forward looking statements should be considered in conjunction with the cautionary statements on slide two in the earnings press release and in the Risk Factors in our SEC filings including the new cautionary statements and risk factors related to COVID-19. Today, we will be referring to certain non-GAAP financial measures, which are reconciled to the most comparable GAAP measures and can be found in our earnings press release. Please note that effective as of the beginning of 2020, we elected to change the presentation of certain taxes related to specific revenue-producing transactions including federal and certain state USF regulatory fees to present all such taxes on a net basis. In addition, our 1Q ‘20 results reflect changes in customer and cost assignments among our business units. All changes are reflected in our supplemental schedules. And on today’s call, comparisons to prior periods reflect these changes. Finally, certain metrics discussed on the call today exclude transformation costs and other special items as noted in our earnings materials. With that, I’ll turn the call over to Jeff.

Thanks, Valerie, and thank you everyone for joining us. I hope you and your families are staying safe and in good health. Obviously, this isn’t a normal earnings season. With the COVID-19 pandemic sweeping the nation and the world, we at CenturyLink have adjusted our priorities and even our approach to the business. On today’s call, I’ll spend a few minutes on our first quarter results. But, during the majority of my time, I’ll discuss the impact of COVID-19 on our Company and my thoughts on the industry in general. After that, Neel will provide an overview of the quarter and outlook for the rest of the year. Then, we’ll open it up to your questions. I want to start by highlighting the incredible efforts of our employees during this crisis to support each other, our customers and the communities where we live. In early March, we sent 75% of our employees to work from home. Literally overnight, they implemented processes and tools to remain effective in the new environment and did so without missing a beat. But, not all of our employees can work from home. We have nearly 10,000 essential workers whose job supporting our customers, and enhancing and maintaining our network requires that they continue to work from work. While I am proud of all of our employees, I’m especially proud of the work-from-work employees who remain in the field and in our network control centers, delivering for the emergency needs of our customers and operating our global network so effectively. Our team has responded to every obstacle with determination, dedication, and resiliency, the same characteristics they bring to their work to transform and grow our business. I can’t tell you how proud I am of our employees. And I feel very fortunate to be part of this team. For those of you on the call who are shareholders, your employees are doing a great job. And I wanted to start the call with a huge thank you to all 42,000 men and women around the globe. Before I get into the details of our response to the ongoing crisis, I’ll make just a few comments about the quarter. During the quarter, we remained focused on profitable growth, transformation of our service delivery platforms and cost reduction initiatives. And we continued to expand adjusted EBITDA margin. As you know, at the beginning of 2019, we modified our capital allocation strategy to focus on investing for growth and reducing leverage, while continuing to return more than $1 billion a year to shareholders through our dividend, slide four in the presentation. We believe this was the right decision for the long-term health of the business and to give us flexibility to weather future economic environment changes. As a result, our liquidity position is strong, we are in a good path to reach the leverage target we established, and we feel good about our dividend payout ratio. While we are confident about our liquidity position, given the difficulty in predicting the shape and timing of an economic recovery, we’ve withdrawn the guidance we provided for EBITDA, CapEx and free cash flow. Slide five provides a summary of our response to the crisis. I’ll start with the measures we put in place to support our employees and how they’ve been responding. From the beginning, we have been clear in our approach that the employees’ safety is our number one priority. Well ahead of government recommendations to adopt social distancing guidelines, we limited meeting sizes, eliminated travel and canceled Company events. Ultimately, in early March, we transitioned the vast majority of our staff to work-from-home. Halting the spread of the virus among our employees and the communities in which they live is our primary goal. We implemented an emergency paid time off program and extended short-term disability coverage to all U.S. employees to allow those directly touched by the virus, greater flexibility and an increased sense of financial security. Protecting our essential employees, whether in the field or in our offices was a special focus. Although now resolved, initially, we were challenged to meet the ever-changing recommendations for personal protective equipment. Our principal concern was protecting the employees and customers doing face-to-face interactions. As a further protective step, we accelerated the implementation of a customer self service model, allowing a higher percentage of our customers to install and repair their own connections. But the main thing we did to protect our technicians was to reinforce that they had full authority to make their own safety decisions. If our technicians don’t feel they can perform a specific task safely, they know they have the right to say no with no second guessing of their decision. If you know anything about the culture and work ethic of the network tech community, you’ll not be surprised to hear that these men and women have taken on the special challenges presented by this crisis with the same customer focus that has long been their hallmark. Finally, we’ve been clear with our employees that we will be very deliberate in our plans to return to our offices. That means returning to many of our locations will likely extend beyond government timelines. Frankly, I doubt we ever go back to the way things were before. As a manager, I was hesitant about embracing a distributed workforce, but the performance of our employees over the past two months has demonstrated that we can remain highly effective when working digitally from home. That performance allows us to be deliberate in our return and more broad-minded about how we work together in the future. We will take our time and accelerate our own digital transformation as we look at the future of work within CenturyLink. As proud as I am of our employees, I’m equally proud of our customers’ responses to the needs of their employees and customers and communities. Across both, the public and private sectors, our customers had moved quickly to upgrade their digital infrastructure to enable distributed workforces and to meet the emergency needs of their communities. We have seen remarkable agility across our entire customer base from insurance companies to healthcare providers, from government agencies to financial services companies, from video and audio conferencing companies to individual consumers. We have been proud to support customers as diverse as the Social Security Administration, State Farm, Blue Cross Blue Shield, the Hazelden Betty Ford clinic, the Banner Engineering and M&T Tech, just to name a few. Our customers moved quickly to increase capacity, deploy more robust VPN capabilities, and add security services and for our consumer customers to establish or improve the connectivity required to adapt to what we now all appreciate to be the shocking reality of working from home and homeschooling children. CenturyLink has taken broad steps to support these efforts, including some instances, turning up conductivity in a matter of hours, and extensive capacity increases for our enterprise customers. COVID-19 will affect every aspect of our business. And I’m especially concerned about financial health of our smallest business customers. These businesses form such a critical part of our local communities, and they may lack the resources to weather disruptions of this magnitude. For small businesses with fewer than 50 employees and our consumer customers, we’ve currently suspended usage limits and committed not to disconnect or charge late fees. Recently, we extended our commitment to the FCC’s Keep America Connected pledge through June. We will continue to assess how we can help support customers who need assistance to sustain themselves, until the economy turns to more normal conditions. By working to support all of our customers as they work through their own challenges, our actions and performance reinforced CenturyLink as a trusted partner. I’ve been inspired to see how our customers have met the demands of this crisis. We should all be encouraged that the commitment, energy and creativity seen in these responses will carry us forward as we begin to reopen the economy. We’ve also stepped up our community support efforts. We’ve donated bandwidth to frontline locations across our footprint, such as the USNS Mercy hospital ship in California, and other temporary health care facilities across the country. We’ve established corporate and employee giving campaigns. We will continue to seek ways to support our communities. But, we believe the most important relief we can provide is to continue to ensure our customers have the connectivity they need to respond to the demands of this crisis. The global pandemic is highlighted and accelerated the digital transformation we and our customers were already experiencing in how we live and work together. But over the past two months, we have seen a step function increase in the speed of those changes. I’m very proud of our employees and our network’s ability to meet that accelerated demand. Compared to typical traffic levels, we’ve seen 30% to 40% growth in internet backbone traffic and a correspondingly significant increase in average usage across our CDN, end user IP, voice and conferencing platforms. While the daily growth in traffic has leveled off over the last few weeks, usage remains high. Not all of that growth translates to revenue, as contracts often include unlimited usage. But, the overall increase in traffic is a positive leading indicator for us. The good news here is that the CenturyLink network was purpose built as a platform of capabilities to handle the growing consumption of bandwidth that is brought about by digital transformation and the fourth industrial revolution. You’ve heard me talk about the benefits of fiber. It is faster, more secure, and far more scalable than other infrastructures. Our network is built to flex in response to in-the-moment traffic increases. But, when those increases begin to reach beyond the limits of our ability to flex, the robustness of our technology and the scope of our fiber and conduit infrastructure allows us to quickly and economically augment to handle the ever-increasing demand, ensuring a great experience for our customers around the world. We’re also seeing changes in the way we conduct business and an acceleration towards digital selling and customer care. However, I want to be clear, we do expect delays in decision-making from our business customers as they reassess their priorities and determine what the future of work looks like within their companies. We believe the critical nature of our services and the renewed importance of digital transformation means this will only be a pause and that our capabilities, close relations with customers position us well for the economic recovery. We are watching our small business segment closely. While not yet seeing an increase in churn, this is an area of concern and attention. With our consumer customers, particularly in the early days, we received requests for speed upgrades along with a rise in overall order volumes. This increased activity demonstrates something we’ve discussed before. Where we invest in fiber and providing higher speeds, we take share in the consumer market. Broadband as a utility you don’t want to live without these days. However, given the rise in unemployment numbers, we are watching consumer churn carefully. Acceleration of digital transformation driven by COVID-19 presents a wide range of opportunities for CenturyLink. Our far-reaching and powerful fiber network together with services like embedded security, edge computing, IP enablement and managed services make us a key-enabler of digital transformation across our economy. In fact, virtually, all of our services have been designed for this digital economy. This crisis has reinforced the value of those services to our customers, and our response has highlighted our ability to meet their evolving needs quickly and effectively. We believe all of this validates the value of our business going forward. At the same time, legacy communication spend will continue to decline. And we know we have to adapt to a lower cost, more customer-friendly digital support model to meet the demands of the future. Our response to this crisis has accelerated some of those plans. And later in the call, Neel will discuss our progress against our transformation efficiencies. The digital transformation is about far more than reducing cost. It is fundamentally about eliminating the barriers of distance and enhancing how people interact, both with each other and with the data that is relevant to their businesses and lives. We believe the current crisis, along with the broader deployment of AI, machine learning, the Internet of Things, edge computing and the like will accelerate the march toward digital transformation, and that CenturyLink is well-positioned to support and benefit. To be clear, we anticipate a negative effect on our near-term results. We have seen some increased demand, but our business is ultimately only as successful as the businesses of our customers. Nonetheless, we believe this crisis has highlighted that the services we offer are at the very heart of the digital economy. We are financially stable, investing in the capabilities our customers need, continuing to digitally transform our own customer interactions, and facilitating and assisting our customers as they seek to realize the benefits from these ongoing technology trends. I’ll now turn the call over to Neel to provide an update on our detailed financial results and our revised outlook for 2020. Neel?

Thank you, Jeff, and good afternoon, everyone. I wish you all good health in these difficult times. Before we get into the details of the quarter and a discussion of how COVID-19 is impacting the business, I’ll provide a few high level remarks. First, our liquidity position is strong, and we are confident about our ability to manage through this crisis. As we navigate these uncertain times, we are pleased with the capital market actions we took over the last year to position the business for the long term. Although we could have never envisioned the pandemic, the current situation further underlines the resilience of our long-term approach to capital allocation. We are exiting the first quarter well-positioned to continue investing in the business, delever and support our dividend policy. Second, we saw continued improvement in our overall revenue performance and expansion in adjusted EBITDA margin this quarter. While we expect to see revenue pressure given COVID-19 and related economic forecasts, we are fortunate to have a diverse revenue base by industry, geography and customer size. Third, the changes we’ve already seen in how we live, work, and interact with each other, highlight the importance of the services we offer and where we are investing. We believe this crisis validates our strategy, and we are continuing to invest in these essential services in our operational and digital transformation. However, as we look at the remainder of the year, we do expect to see pressure on both, revenue and the speed with which we continue to take costs out of the business, as a result of COVID-19. With the current uncertainty, particularly as it relates to timing for an economic recovery, we are withdrawing our full-year 2020 financial outlook for adjusted EBITDA, free cash flow and capital expenditures. Given our confidence in our liquidity position, and focus on free cash flow, we have reaffirmed our deleveraging target and current dividend policy. Moving now to our first quarter results on slide six. I’ll highlight a couple of things. We saw an improvement in our revenue trajectory this quarter and we made additional progress on our cost transformation initiatives. We are now at $510 million of annualized run rate adjusted EBITDA savings. We expanded margins by more than 100 basis points, compared to the year-ago quarter to 42.9%. We continue to improve our maturity profile and exited the quarter in a strong liquidity position. Turning to slide seven. Our revenue is largely recurring from a well-diversified customer base, which will help us manage through this economic cycle. Although some of our customers will be highly impacted by the pandemic, we believe the connectivity services we provide are critical to their operations. The industries we expect to be highly impacted, as defined on this slide, represent about $1 billion in annualized revenue or approximately 5% of total revenue. As we look across the business, we believe the largest area of risk is the SMB business unit. So far, we haven’t seen any significant lengthening of SMB receivables. As we consider the risk within the business unit, I’ll note, on an annualized basis, approximately $250 million or less than 10% of revenue in our SMB channel are from highly impacted industries. In terms of customer size, customers with less than 50 employees represent approximately $1.6 billion of annualized revenues. Turning to first quarter revenue results on slide eight. On a year-over-year basis, for the first quarter 2020, total revenue declined 3.7% to $5.2 billion, compared to 5.1% in the first quarter of 2019. We have seen steady improvement in our revenue trajectory over the last few quarters. Sequentially, total revenue declined 1.5%, compared to a decline of 2.2% in the first quarter of 2019. Moving to slide nine and revenue by business segment. On a year-over-year basis, International and Global Accounts or IGAM revenue was roughly flat and grew 1.3% on a constant currency basis. This compares to a decline of 4.7% in the fourth quarter of 2019. On a sequential basis, IGAM declined 0.6% on both reported and constant currency basis, compared to a decline of 3.5% in the first quarter of 2019. Moving to our Enterprise segment. On a year-over-year basis, revenue decreased 0.4% year-over-year. This compares to a decline of 2.1% in the first quarter 2019. On a sequential basis, Enterprise declined 1%, compared to a decline of 2.4% in the first quarter of 2019, which is the typical seasonality we see in the first quarter of each year. In the short term for both IGAM and Enterprise, we expect the demand impact from cancellation of live events and customers deferring major network buying decisions. However, the funnel remains strong and the theme from current customer conversations has been a delay of around 60 to 90 days, but with no fundamental change in long-term demand for our services. In fact, several of our customers are evaluating accelerating their own digital transformation, which we expect to be a benefit over the long-term. SMB revenue decreased 6% year-over-year, in line with the average year-over-year decline of 6.5% in 2019, primarily driven by continued declines in legacy voice services. As we look at SMB for the remainder of the year, as I mentioned earlier, this is an area of concern. We are working closely with these customers as they are critical not only to CenturyLink, but the entire U.S. economy. So far, we have not seen a material change in churn, but we are closely monitoring the situation. It is also important to note that SMB is an opportunity for us, and we will continue to focus on increasing market share in our on-net buildings. Wholesale revenue decreased 7% year-over-year. This compares to a decline of 6.1% in the first quarter 2019. Sequentially, we saw a decline of 2.5% compared to a decline of 3.3% in the fourth quarter of 2019. With respect to Wholesale, just as we are doing, we expect customers in this segment will continue to optimize spending with other vendors in this environment, which may put pressure on revenue in the coming quarters. Additionally, as many of their enterprise customers defer buying decisions, we would expect to see the second quarter impact. Turning to Consumer on slide 10. For the first quarter 2019, revenue declined 5.8% year-over-year, primarily driven by legacy voice revenue. Broadband revenue for the first quarter 2020 was flat year-over-year. We continue to focus on improving broadband revenue performance by our targeted c investments and driving up penetration of our competitive assets. In the first quarter, we saw a net loss of 11,000 total broadband subs in speeds of 100 meg and above, we added 60,000 subs. From a consumer standpoint, as work-from-home began to ramp, we saw an immediate increase in new orders and requests for speed upgrades. Within the context of social distancing, our field technicians are doing a good job keeping up with order volumes. As we recover from COVID-19, we don’t expect the pendulum to swing back all the way, positioning us well for the long term. At this point, we haven’t seen a material increase in overall churn, accounts receivable or bad debt. Turning to adjusted EBITDA on slide 11. For the first quarter of 2020, adjusted EBITDA was $2.243 billion, compared to $2.262 billion in the first quarter 2019. We continue to expand adjusted EBITDA margins during the quarter, which grew to 42.9% compared to 41.7% in the year-ago quarter. Despite a year-over-year revenue decline of approximately $200 million this quarter, our adjusted EBITDA was relatively stable as we focused on cost transformation, and profitable revenue growth. Regarding the COVID impact, we saw pluses and minuses during the first quarter. These items are hard to quantify, but we believe the net impact is a slight negative two first quarter 2020 adjusted EBITDA, primarily driven by reduced activity in the last 2 to 3 weeks of March. In terms of bad debt expense, at the beginning of the year, we adopted ASC 326. At this time, we have not seen any changes to any of our metrics and cannot accurately predict with any certainty, how the changing economic environment will impact our overall bad debt. We did not increase our bad debt reserves in the first quarter 2020, but we do expect to see an increase in bad debt, specifically in our SMB and consumer segments. And we’ll have more to say on our second quarter earnings call. As of the end of the first quarter, we achieved approximately $510 million of annualized run rate adjusted EBITDA transformation savings. However, social distancing and prioritization of other critical activities did impact the pace of our cost transformation efforts and are expected to continue to impact some of our initiatives in the near-term. For example, we are experiencing delays in real estate site exits and off-net to on-net migrations as our customers are working from home or are focused on their own responses to COVID-19. We remain confident in our three-year transformation plans. The opportunities have not changed and we continue to expect to achieve the $800 million to $1 billion in annualized run rate adjusted EBITDA savings. We expect to accelerate as the current situation improves. Integration and transformation costs and special items incurred in the first quarter 2019 impacted adjusted EBITDA by $34 million and free cash flow by $82 million. For the first quarter of 2020, capital expenditures were $974 million, this compares to first quarter 2019 CapEx of $931 million. We increased our CapEx spend as we prepared for the COVID-19 crisis by investing in inventory in the event of any supply chain disruption. However, to-date, we have not seen disruptions for network equipment. Given the environment, we are going to be very measured in terms of how we spend capital. Generally speaking, our CapEx funding is success-based. Going forward, we are ensuring that capital spending is well-aligned with sales and volume growth on the network. We may reduce spending in certain areas in the near term, such as buildings that are predominantly driven by SMB or other high-risk demand. We are continuing to invest through this uncertain time, primarily in long-life assets like fiber, where we see predictable returns. In the first quarter of 2020, the Company generated free cash flow of $407 million, this compares free cash flow of $315 million in the year-ago quarter. This year, consistent with prior years, we saw higher use of cash in the fourth quarter, due to higher working capital associated with annual bonus payments, prepayments on maintenance contracts and payroll taxes. The growth in free cash flow was driven by improvements in net cash interest and is a function of our deleveraging plans. Turning to capital markets activity on slide 12. As we mentioned on the fourth quarter earnings call, we completed $10 billion in refinancings in January of this year. In addition, we completed over $90 million of open market purchases in March. And subsequent to the close of the quarter, we paid down $1 billion of debt at maturity. As you can see on slide 13, we have very little in maturities in the near term. I wanted to take a moment and touch on our pension fund. At year-end 2019, the funded status of our pension was 86%. We generally report our pension funded status only on an annual basis. However, given current conditions, we are providing an update as of the end of the first quarter. Exiting the first quarter, our funding status was approximately 83%. We have significantly derisked the plan over the past 18 months and are pleased with our position, particularly given current market performance and volatility. As we mentioned on our fourth quarter 2019 earnings call, there are no funding requirements in the near term. Let’s now move to a discussion of our financial outlook for the remainder of the year on slide 14. The current situation brings several layers of uncertainty. It is hard to predict when the economy will recover or when enterprises will return to predictable buying patterns. Over the long term, our ability to work effectively with our customers is the primary indicator of growth. In the short term, we do believe the economy will affect the behavior of our customers. With that in mind, we do not believe that we are able to estimate the full year financial impact of COVID-19 with reasonable accuracy and are withdrawing our full year 2020 financial outlook for adjusted EBITDA, free cash flow and capital expenditures at this time. All other measures remain unchanged. To summarize, our revenue base is diversified and largely recurring and the services we sell are essential to our customers. Given the tough decisions we made regarding capital allocation last year, we have the ability to invest in growth through this cycle. Our balance sheet and liquidity position are strong. With respect to the dividend, we modeled multiple downside scenarios, and under all scenarios, we expect our payout ratio to remain in the 30s as a percentage of free cash flow. As such, we remain comfortable with our dividend policy. Finally, we remain committed to our target leverage range of 2.75 to 3.25 times net debt to adjusted EBITDA. However, it may take us a quarter or two longer than originally planned. Before I wrap up, I’d like to express my gratitude to our employees, who have been performing extremely well during this pandemic. With that, we’ll open it up for your questions.

Thank you. [Operator Instructions] And our first question will be from the line of Tim Horan with Oppenheimer & Company. Please go ahead.

Thanks, guys. We’re about almost halfway through the second quarter. I know, there’s a million puts and takes. But, can you give us some color on how the revenue trends so far this quarter? It doesn’t sound like it’s changed a real lot from the first quarter, or maybe some areas where you’re seeing some strength, doesn’t sound like you’ve seen a huge amount of weakness yet. And then, secondly, do you think the federal government might take this opportunity of COVID to kind of come up with a more nationwide USF plan for broadband that’s more comprehensive at this point? Any thoughts on that would be helpful. Thanks.

Yes. Let me take that question first. I don’t know. We’re working closely with the FCC. I do know that they are working on their auctions for CAF -- additional CAF type capabilities, the RDOF auctions. But, whether they go beyond that or not, we don’t know yet. But, we’ll continue working with them and see if there are opportunities. Because I do know that the FCC recognizes the value of broadband, recognizes that probably a lot of companies are going to shift to more work-from-home in the future. And distribution broadband needs to be pretty broad to enable that.

Tim, on your question on the revenue trends, it’s very similar to what I mentioned. When you look at IGAM and Enterprise customers, they’re really focused right now still on what they need to do in terms of their own COVID responses. So, it’s been really network upgrades, enabling their employees to work from home, increasing capacity into their data centers. So, we’re supporting all of those initiatives. In terms of new projects, broadly defined, I think the funnel is still strong. And so, the fundamental demand picture hasn’t changed. The general conversation tone has been kind of a 60 to 90-day type delay.

In SMB, we’re still seeing sales, but at lighter levels than we did in March. And we haven’t seen any pickup.

Thanks.

Our next question is from the line of Batya Levi with UBS. Please proceed.

Great. Thank you. I appreciate that there’s a lot of uncertainty. But, can you give us a little bit more color on how to think about revenue pressure versus cost-cutting opportunity? Because, I guess, the dividend policy staying around 30% payout kind of suggests free cash flow is going to remain $2.7 billion to $3 billion range. Can you help us understand a little bit in terms of potential to continue to cut costs to offset some of that revenue pressure? And maybe just a follow-up on SME. Do we have a sense of how many of your customers took the Keep America Connected pledge and are non-paying customers right now? Thank you.

I will start with your revenue pressure question, Batya. Like you said, it’s -- there’s a lot of uncertainty right now, but a couple things to keep in mind. One is we’re largely a recurring revenue business and the services that we provide are really critical to the customer. So, even if you think about SMB and you think about connectivity, a lot of the services we provide are supporting point of sale systems, security cameras, things like that critical to their operations. So, it’s still early days. So, if you think about cost reductions that these businesses have undertaken has been around reducing headcount, but the infrastructure is still in place. So, the revenue is hard to tell. On the cost transformation side, the delays we’ve had are more around where social distancing is an issue. But, as things tend to improve, we’ll accelerate on our cost transformations. We have a lot of levers there. But, like you know that in the near term, like Jeff emphasized, we have the financial flexibility to do the right things to support our customers to the right things to support our employees. So, we will have a financial impact in the near term. But we have a lot of levers by the time we get to free cash flow. And so, we’ll be managing costs tightly. We’ll be calibrating our capital, although we’ll be interesting. We’ll be calibrating our capital to demand and sales. And we feel pretty good at the free cash flow level. And like I mentioned, the models, the scenarios we’ve modeled, all of them are in the 30s in terms of dividend being as a percentage of free cash flow.

Batya, you’ve been listening to these calls for a long time and you’ve heard me say that our ability to win is based on our ability to execute, not the macroeconomic environment of the market. That’s the difference this time. The market does dictate to some extent the timing of our ability to win. But what we’ve seen is our customers need our products and services more than -- now more than ever. They’re relevant, they’re capable products and services to meet their challenges. We’ve done a great job of executing and delivering for those customers. And I’ve gotten a number of emails from CEOs and department heads, thanking me for what we’ve been able to do in very short periods of time. And so, we do -- there’s a lot of uncertainty. But, it’s not long-term uncertainty, it’s short-term uncertainty. What does the shape of the recovery curve look like? When do we get started? And some of that affects our capital deployment and our cost savings. So, for example, in capital, getting permits and hotel rooms for construction crews and that and type of thing in our rural environment with CAF build-out. If you look at our, our cost savings initiatives that are affected by this, things like converting off-net to on-net. Our customers aren’t in their offices. We can’t convert them off-net to on-net when they’re not there. And until some of those things clear up, the visibility is a little bit hard. But there’s nothing about this, this has done anything other than reinforce that the products and services we have are exactly where our customers are headed and exactly what they need.

Thank you. That’s helpful. Any sense for the non-paying customer accounts since the pledge?

We haven’t really seen any lengthening of AR yet. So, it’s really early days. So, we track that on a daily basis. And so far, I would say, it’s within the variations we see business as usual. But we know it’s going to be coming, but it’s still early days.

Okay. Thank you.

Our next question is from the line of David Barden with Bank of America. You may proceed.

Hey, guys. This is Angela Zhao on for David Barton. Thanks so much for taking the questions, a couple if I may. First, could you quantify any impact the COVID-related shutdown may have on transformation cost reduction plan or is this more of a timing issue? And could you talk more to the cadence of returning to a normal cost reduction glide path? And I have two more.

So, overall, target that we provided from a cost transformation perspective, $800 million to $1 billion, and we said three years at the time we announced that. We feel very good about that. So, the opportunity hasn’t changed, and our line of sight to those reductions hasn’t changed. It’s just delay in the interim. So, as we kind of work through some of the physical distancing issues, so no issues from that perspective.

Okay. Got it. And what are your thoughts around long-term potential cost savings for the business as a function of sort of COVID-related learning, for example, working from home from the employees optimizing real estate in terms of headquarters, offices and call centers, et cetera?

So, that’s a great question. So, we’re looking at it right now. So, as we think about total cost per employee, we’re taking a harder look at, okay, real estate for instance, how we can shrink the amount of space that we need. And so, if you look at the total cost, and connectivity is relatively cheap, compared to commercial real estate. And so, we’ll be evaluating that. And I think all businesses will do the same.

Thank you so much. And then just last one. How have sales been affected by COVID-related stay-at-home measures? And do you see this evolving as we go through recession, and specifically across various business divisions?

So, for first quarter, given the impact was only a couple of weeks, and for some of the regions that we operate in, some of the markets like Seattle and San Francisco Bay Area, it might have been a little longer, our sales were still up year-over-year for IGAM and Enterprise. So, relatively small time period in terms of the impact. But, for second quarter, it’s too early to tell. And so, we’ll continue to monitor that.

Thanks for the question.

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

Hey, guys. This is Rob on for Frank. Hope everyone’s families are staying healthy and safe throughout all of this. I had a question. Are there any business lines that you guys might look to exit if they start to weaken during the recession? And then, to what extent do you think you might need to do workforce reductions? Thank you.

Well, we always look at all aspects of our business and say are there things that we should exit or should we be acquiring. We don’t see anything right now as a result of a recession, which would lead us to exit any particular business line. We’ll keep an open mind to pay attention to but don’t see anything today.

And on your second question on reductions, that’s been an ongoing process for us. We’ve in fact slowed down in the interim. But, that’s part of our overall cost transformation initiative. And it really is a function of resource allocation shift from legacy products, which are declining. So, we’re rightsizing the cost structure there, and we’re adding in areas where we’re investing,but our headcount has been down and will continue to go down.

Our next question is from the line of Philip Cusick with JP Morgan. Please begin.

Hey. This is Reed. [Ph] Thanks for taking my questions. Maybe two quick ones. Recognizing the guidance has been pulled, but CapEx in 1Q, focused on inventory, would you update us on any progress, the fiber deployment effort made in the first two months of the quarter? And you touched on permitting, but on the flip side, have the shelter-in-place rules provided any kind of opportunity to proceed with construction, a little more quickly, maybe pull it forward? Thank you.

Yes. We haven’t heard of any real opportunities to pull things forward from a construction perspective. But, it really is just do -- can we get hotels in rural areas, can we get permits in urban areas, how do we continue to expand the footprint. We are continuing to expand the footprint in the first quarter for our enterprise customers, we continue to add buildings. I think we’re somewhere around 4,500 buildings. That’s probably something that we will slow down in the coming months as part of our looking and waiting and seeing what happens with small and medium enterprise customers. So, we’ll continue to pay close attention to, but we didn’t have any market performance declines in our ability to add buildings. From a consumer perspective, we are very serious about investing fiber to -- through our micro targeting strategy that we’ve talked about before. And it’s successful. We want to invest fiber where we can afford to do so, and wherever we invest fiber we grow, and we drive penetration out. So, we’ll continue to do that. Overall, we’re a fiber company. We continue to invest capital to expand and augment the fiber network in more locations, take better use of edge computing, all of the different trends that we see in the market.

Just to add to that on consumer bills, we were a little over 2 million units at the end of the year; we’re now at about 2.1 million.

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

You’re acknowledging that there’s going to be some timing issues for the reasons that you laid out. Generally speaking, do you expect to be able to take costs out of the business at a pace consistent with the revenue declines you might experience, or would it be a bit challenging to accomplish that?

Well, there’s a lot of uncertainty around the revenue trajectory. So, it’s really hard to answer that, because we don’t know what the revenue trajectory is going to look like and we’re managing the business for the long-term. So, if we can go faster without compromising anything in terms of our long-term strategy, absolutely we will. But, we’re going to be measured about it. So, we’re really going to focus on our objectives that we have on a cost transformation side, a big byproduct with Jeff -- you hear Jeff talk about all the time is improving customer experience. And along those lines, if we can accelerate, we will. But, we wouldn’t want to do anything that impairs our ability to grow when the situation improves.

Okay, understood. And then, Neel, you also commented that you’re going to be very measured with capital spending. Can you help us get a bit of a better sense for how much you could flex it if need be? What share is success based, what share relates to longer term, discretionary projects, maintenance and so on?

So, when it comes to capital, I’d make the exact same comments that I just made on the cost side. So, there’s always trade-offs in terms of how you run the network, how much capacity you have, that ties into your customer experience, reliability, et cetera. But if volumes are, then we’ll cut back. If there are areas where we question the predictability of the returns, then we’re going to cut back. If we see for consumer that we’re not ramping up penetration in the way that we would like, then we will cut back. But, the key point is, we have a lot of levers and we’re going to be very, very success based about it.

Okay. Got it. Thank you.

Our next question is from the line of James Ratcliffe from Evercore ISI. Please go ahead.

Thanks for taking the question. Can you just give us an idea that on balance how does lower -- across the board, lower customer activity affect revenue? The loss or delay of opportunities versus customers not taking actions that could be churn or price renegotiation, et cetera. So, just give us an idea on that and that would be helpful. Thank you.

Yes. So, customer delays affect us in several ways. One type of delay that we expect to see, haven’t seen a bunch of yet, but we expect to see customer delaying buying decisions, reengineering their network, reengineering their plans, understanding where they’re taking their business as a result of the COVID crisis and making sure that their networking plans and computing plans match the new target of what they’re trying to build. So, we’ll see that type of delay. One, we are seeing a little bit more right now is customer delay on installs, because they don’t have people in the offices to turn up capacity and turn up services. And so, we’re seeing customers minorly, these are not major impacts to our business, because the type of delay that we’re seeing currently.

Okay. Thank you.

Our next question is from the line of Mike McCormack with the Guggenheim Partners. Please go ahead.

Hey, guys. Thanks. Maybe just a quick comment, Jeff or Neel, just on the overall landscape out there for assets. It seems like obviously, we’ve got two other companies that are in kind of similar businesses to your consumer business that are in bankruptcy. Is there an opportunity out there to be picking up assets that might be attractive for you guys?

Well, we don’t comment on particular opportunities one way or the other. But, we’re an acquisitive company and we have they have been in the past, and I expect we will continue to be so. And my preference is to acquire companies that are providing a capability that we don’t have that we need. And so, we’ll continue to look at all of those. But, there are also synergies that you can pick up by acquiring companies. So, we will look at some of the companies you would think of out there and continue to focus on does it make sense for CenturyLink. We’re not opposed to it. We’re not necessarily leaning into. But, we will make sure that we look and stay abreast of all the different opportunities.

Thanks, Jeff.

Sure. I think, we have time for one more question. No questions left, right? Well, let me do a quick wrap-up and close the call with few key thoughts. While we’re still in the early days, and there are a lot of unknowns, one thing I feel certain is that the demand for fiber and for the services we provide are more important than ever. I’ve said this couple times on the call, CenturyLink, though will also rise to the challenge to meet customer needs. And we’ve seen that in spades over the last two months. So, very, very pleased with how we’ve been performing. COVID-19 is accelerating the digital transformation efforts, both of ours and our customers’. And so, we’ll continue to see our network-related services are critical to supporting those efforts. Our actions last year to shift our capital allocation strategy and focus capital on deleveraging and investing in the business to place CenturyLink in a strong financial position with ample liquidity, comfortable payout ratios and manageable maturities for the next few years. Even in the midst of so much uncertainty, we believe we’re well-positioned to weather the near-term financial impacts to COVID and to take advantage of the ongoing digital transformation to drive long-term growth and free cash flow per share. I normally end with a focus on our free cash flow per share. Today, I’ll close by repeating what I said at the beginning of the call. I’m very proud of our employees, and we will continue to keep their health and safety as our top priority. Thank you for joining today’s call and for your interest in CenturyLink. Operator, that concludes the call.

Thank you. We would like to thank everyone for your participation and for using the CenturyLink Conferencing Service today. This does conclude the conference call. We thank you for your participation and ask that you please disconnect your lines. Have a great day everyone.