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…

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…

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.