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CenturyLink Inc (CTL) Q2 2019 Earnings Call Transcript

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CenturyLink Inc (NYSE: CTL)
Q2 2019 Earnings Call
Aug 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to CenturyLink's Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, August 7, 2019. It is now my pleasure to turn the conference over to Valerie Finberg, Vice President of Investor Relations. Please go ahead, Valerie.

Valerie Finberg -- Vice President of Investor Relations

Thank you. France. Good afternoon everyone and thank you for joining us for the CenturyLink Second Quarter 2019 Earnings Call. With us on the call today are Jeff Storey, President and Chief Executive Officer and Neel Dev, Executive Vice President and Chief Financial Officer.

Before we get started, I need to call your attention to our Safe Harbor Statement on slide two of our 2Q '19 presentation which notes that this conference call may include forward-looking statements subject to risks and uncertainties. In addition, we will refer to certain non-GAAP financial measures which are reconciled to the most comparable GAAP measures. Those reconciliations can be found in our earnings press release or our supplement of schedules. Additionally, please note that 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.

Jeff Storey -- Chief Executive Officer

Thanks, Valerie. And thank you to everyone for joining us. On today's call, I'll give you an update on the state of the business. Neel will provide an overview of the quarter's financial results and then we'll go directly to your questions.

I'll start by saying, during the quarter we continue to improve our customer experience, increased our business in wholesale sales sequentially and expanded our adjusted EBITDA margins to 40.7%. The quarter's results continue to validate the core tenant of CenturyLink. By delivering outstanding products over a world-class infrastructure with a primary focus on operational excellence, we can drive revenue, margin expansion and bottom line profitability. While we have a long way to go to simplify and streamline our internal operations and our customer interactions with CenturyLink, we certainly see the tangible results of our efforts that benefit both customers and shareholders.

Since the close of the Level 3 acquisition, our adjusted EBITDA margins have expanded by more than 500 basis points and as we've said previously, we already have identified $800 million to $1 billion in run rate transformation savings. As of the end of the second quarter, our transformation initiatives delivered annualized run rate savings of $290 million and we believe our results validate our ongoing ability to find, capture and generate savings while focusing on profitable revenue growth.

During this quarter, we made good progress on our deleveraging objectives and our leverage ratio of net debt to adjusted EBITDA is now 3.8 times. We feel confident in our ability to meet our leverage target of 2.75 to 3.25 times within the next three years. From a revenue perspective, while year-over-year total revenue declines increased slightly, we saw improvement in sequential total revenue performance. We also saw improved revenue performance in iGAM and Enterprise both year-over-year and sequentially. While you've heard me say before the progress is never linear given the leading indicators and service delivery sales and our sales funnel, we continue to expect revenue for iGAM and enterprise to be higher in the second half of this year compared to the first half.

I've mentioned on previous calls that we're investing to meet our customers growing and evolving needs, CenturyLink has what I believe to be the world's best most scalable and efficient fiber network. However, we continue investing and working hard to expand our infrastructure, broaden our service capabilities and create a better digital experience for our customers and our employees. We also recognize that our customers needs are continually evolving as technology advancements drive changes within their operating models. I thought I'd give you a few recent examples that illustrate where we see the market going and how we are investing to drive growth in our business.

As I mentioned last quarter, we added 4500 new fiber fed buildings to our unmet footprint in the first quarter of 2019. We continue that focus in the second quarter with the addition of approximately 5,000 new fiber fed buildings. For contrast, Level 3 used to add something closer to 500 buildings per quarter so I want to emphasize, expanding our fiber footprint is a major area of focus for us. We know that when we have a building on net, our fiber-based services provide a better, more reliable and higher margin solutions and competing infrastructure. Fiber beats twisted pair copper, it beat hybrid fiber Coax and it beats wireless, whether that's 5G or not fiber wins. It's highly flexible and increasing speeds, it is secure and really is the basis for all the other competing technologies. We just do one thing differently, we take fiber all the way to the customer and customers always want fiber when they can get it. You can expect us to continue investing to expand the reach of our access fiber network.

Beyond just being a superior technology though, fiber is well suited to meet the demands of emerging opportunities driven by artificial intelligence, machine learning and big data applications. Fiber-based solutions are better able to satisfy what we see as four key market trends. The need for highly scalable capacity now ranging into multi-gigabits per second, the need for connecting and increasing number of widely distributed locations, the need for the network itself to protect the privacy and security of our customers and finally the need to move bandwidth-intensive computing resources closer and closer to the edge to reduce latency and unnecessary backhaul of traffic. Expanding our on-net building footprint certainly helps us meet these needs but we've implemented a number of other initiatives to ensure CenturyLink maintains our position as the premier fiber-based provider for enterprise customers.

Turning to slide four in our presentation, last quarter we showed a similar map illustrating our North American sub-sea fiber route. This is a unique asset and as I said earlier, we believe it represents the world's most scalable and efficient fiber network. However, we are further augmenting our capabilities. We also own an extensive and unparalleled conduit system that we leverage to bring the latest generation fiber capabilities to market with extraordinary speed and economic efficiency. Each of the long-haul networks, we've acquired Level 3, Quest, WilTel , Broadwing all had multi-conduit builds. Within the Level 3 network alone, we've built 12 conduits to ensure we had sufficient space to grow and evolve as capacity in fiber technology evolved. Most of those conduits are still available for further network augmentation but we've also interconnected all of those conduit systems to cherry pick the shortest and lowest latency pads across the country .

As illustrated on slide five, we have recently announced the deployment of Corning's latest generation of ultra-low loss fiber to build the world's best, most scalable optical infrastructure. This new technology enables higher capacity and more efficient optical design than earlier fiber technologies. Coupled with the selecting the shortest physical path between any two endpoints, we also improved latency significantly which is a key factor for hyperscalers, bandwidth intensive enterprises and dark fiber customers. We've completed 3.5 million miles of our current plan to build a total of 4.7 million fiber miles with ultra-low loss fiber, roughly 75%. We continue to see demand for additional routes and will consider those to meet future customer needs.

We have recognized that access in long haul transport only part of the solution. There is increasing demand for computing capabilities at the edge of the network and we believe we are uniquely positioned to capitalize on this market opportunity.

In addition to our far-reaching fiber network, we operate a large number of Edge locations that are well suited to enable Edge computing. In the coming weeks, we expect to announce details of our investments in our widely distributed and extremely well connected edge computing infrastructure. Let me give you a specific example from a customer of what fiber-based edge computing capabilities can name for them.

Slide six shows an actual customer with close to 2000 nationwide locations, we are working with this customer to evaluate the effectiveness of our Edge computing solutions to more efficiently run applications and process huge amounts of data very close to the origin of that data. On this slide, you can see that our existing infrastructure is positioned within 5 milliseconds transport time for 95% of their sites. This means that the customers applications and data can be processed more efficiently from a 100 or so of our Edge locations rather than processed on premise at 2000 separate sites even worse for the customer or backhauled to a central location.

In addition, our dynamic networking capabilities can provide real-time network provisioning from the customer premise to our Edge and then on two major cloud service providers. This example is for a specific customer but the results are indicative of what we see from other customers we're currently working with.

This application can be an important solution for retail, banking and really anyone that has a number of dispersed service locations, the need to process large amounts of data in real time. The combination of our fiber network with Edge computing infrastructure and managed services support is a very powerful and differentiated service offering.

We are not suggesting that Edge computing will eliminate the need for today's hybrid computing or hybrid networking. To the contrary, our customers will continue to build and operate their own data centers and will continue to move compute resources to public data centers, and specific applications to cloud service providers.

Our customers want to dynamically manage their network and put different types of workloads in different environments. Through our wide array of hybrid networking solutions, CenturyLink provides the flexibility to do so easily. CenturyLink enable this flexibility with services like dynamic connections, which allows our customers to make instantaneous changes to their network, capacity and configurations and our cloud application manager, which allows customers to manage their applications across hybrid cloud environments through a single seamless interface.

Our network was purpose-built to enable us to expand at the lowest cost in the industry and that's a big advantage. It allows us to go to market quickly and invest in these types of growth initiatives within the bounds of our ongoing capital plans. This efficiency is demonstrated in our ability to invest in all of these initiatives as well as other growth opportunities within the scope of the capex outlook we provided for the full year 2019. Of course, the purpose of these investments is to drive growth. We are beginning to see the benefits of these capabilities, improving our ability to win. I'll give you another specific customer example of how investments in flexible, scalable fiber-based connectivity are helping us win in the market.

We recently won a contract to provide secure cloud connectivity to the US Census Bureau for the upcoming 2020 census. We will formally announce this contract later this week. To support the Census Bureau's objectives to provide the best mix of timeliness, relevancy, quality and cost for the data they collect in the services they provide, CenturyLink will help to collect the Census digitally by providing the Bureau with managed, trusted, Internet Protocol services or MTIPS at speeds 40 gigabits and higher.

MTIPS-a managed security service that provides secure cloud-based connectivity will support the online system that will be available to all households completing the 2020 survey. The solution also allows the Census Bureau to access the responses via secure cloud applications for the first time.

CenturyLink was selected by the Bureau due to our ability to meet their requirements for scalable connectivity and will play an integral role in helping the US Census go digital in the most secure, reliable and cost effective way as it takes an important mission of completing the 2020 centers. The Census is obviously a unique example but that's the point of hybrid networking solutions from CenturyLink. Our customers can enable the capabilities to address their particular need. This solution highlights our ability to provide scalable, flexible network solutions that we believe are defining the next generation of enterprise networking.

Turning to our own internal transformation initiatives, as I noted earlier, we're making good progress in this area. Exiting the quarter with around $290 million in annualized run rate savings. We appreciate the cost efficiencies and we know they're substantial. But the cost savings are almost a byproduct, the real value comes from the significant improvements in the service experience both for our customers and employees, the result from an entirely digital interaction model. These improvements not only enhance margins, they increase customer satisfaction, reduce churn and improve sales.

This work is as important as anything we're doing in the business and we are very focused on doing it well. Neel will cover the specific results of the consumer business but I will highlight that we are continuing to see success with our micro targeting efforts. As a reminder, we micro target where we build fiber and our micro targeting our marketing and sales efforts too. We are continually expanding these efforts and new neighborhoods and additional cities where we have said about our consumer business still holds. We will invest where we can grow revenue profitably and we will grow where we invest.

We are seeing the benefits of this approach and have more than doubled the number of subscribers with services at 100 megabits per second and higher since the second quarter of 2018. We will continue to push for higher market share in the areas where we have invested to enable these higher speeds.

I'll also note that related to the consumer business, we took a $15 million charge during the quarter in connection with a tentative settlement we've reached in the nationwide consumer class action cases, we've been defending since mid-2017.

The agreement remains subject to judicial approval, but we're very pleased to have a tentative resolution of the class action claims behind us. We've been very focused on simplifying and improving our customer experience, since before this litigation was initiated and feel good about the ongoing improvements we are seeing in that part of the business.

Before I turn the call over to Neel, I wanted to comment on the strategic review for our consumer business. Our internal team and our advisors are making good progress in the review. With that said, as we mentioned last quarter, this will be a lengthy and complex process and we do not intend to provide updates until we have determine the best path forward.

In the meantime, we are not modifying our consumer investment and we are continuing to operate our consumer business to transform it and the services we offer. I'll also reiterate something I touched on last quarter and that is that this process is not unusual for us. We evaluate all aspects of our Company on an ongoing basis to ensure we are using our assets to deliver the best value for our Company and our shareholders.

If we see opportunities to drive higher levels of value with alternative approaches much like you see us undertaking in the consumer review, we will do the work necessary to understand our options and implement the options to provide the best free cash flow per share return.

I'll now turn the call over to Neel to provide an update on our detailed financial results for the quarter after that we'll open it up for your questions. Neel?

Neel Dev -- Executive Vice President and Chief Financial Officer

Thank you, Jeff and good afternoon everyone. I'll start with our financial summary on Slide 7. We grew adjusted EBITDA to $2.269 billion billion from $2.262 billion in the first quarter of 2019. We expanded adjusted EBITDA margin over 500 basis points to 40.7% this quarter compared to 35.5% of the close of the Level 3 transaction.

We were able to accelerate our cost transformation initiatives and deliver $290 million of annualized run rate adjusted EBITDA savings and based on our continued progress to-date, we feel good about our financial performance and are reiterating our outlook for adjusted EBITDA and free cash flow for the full year 2019.

To put the first half of 2019 into perspective, we grew adjusted EBITDA by $80 million compared to the first half of 2018 while revenue declined more than $600 million over the same period. This was driven in part by our focus on adding profitable revenue in de-emphasizing unprofitable lines of businesses, managing legacy product declines, along with synergies on our cost transformation initiatives.

Turning to revenue on Slide 8, total revenue in the first quarter declined 5.5% to $5.58 billion. Quarter-over-quarter, total revenue declined 1.2% compared to the 2.3% sequential decline we saw last quarter. As I just mentioned, last year during the course of 2018, we implemented guardrails to drive profitable revenue which has led to difficult year-over-year comparisons. Our iGAM revenue was roughly flat compared to the second quarter of 2018 adjusting for FX, iGAM grew 1.6%. Sequentially, revenue increased 1.2% compared to 3.5% decrease last quarter.

We did see an impact to revenue this quarter from the contract rerates that we mentioned last quarter, however, those revenue declines were offset by strength in nonrecurring revenue items. Keep in mind this group contains some of our largest customers and we could see revenue fluctuations in any given quarter based on rerates or renegotiations but over the long term, we feel confident in the trajectory of this business.

Moving to our enterprise segment, revenue declined 1.2% both year-over-year and sequentially. This compares to a decline of 1.6% year-over-year and 2.2% sequentially in the first quarter of 2019. Overall, looking to the second half of the year for both iGAM and enterprise, our sales funnel is strong and we feel good about all the leading indicators for revenue growth. As such, we expect revenue for these two business segments to be higher in the second half of 2019 compared to the first half of 2019.

SMB revenue decreased 10% year-over-year compared to a decline of 3.7% in the first quarter of 2019. Revenue in the second quarter 2018 included a benefit from several non-recurring items, making the year-over-year comp challenging. Sequentially, revenue declined 2.5% compared to a decline of 0.1% last quarter. As a reminder, in the first quarter of 2019, we have particular strength in nonrecurring revenues.

The revenue declines in the SMB business are largely driven by legacy voice. we feel good about our ability to sell into our on-net building footprint with a large addressable market opportunity. Also, revenue decreased 8.8% year-over-year. As we referenced last year in the second quarter of 2018 wholesale revenue included a favorable dispute settlement with a large carrier. Sequentially, we saw a decline of 1.8% compared to a 3.4% decline last quarter. Slide nine has our product mix by business segment. In both our iGAM and Enterprise, we expect that sales growth and other product lines will offset legacy voice declines.

In the SMB segment, despite sales growth given voice represents 45% of total revenue, the journey will be a bit longer.

Turning to consumer on slide nine, second quarter 2019 revenue declined 8% year-over-year and 1.7% sequentially and is generally in line with the revenue performance we saw in the first quarter of 2019. In the second quarter, we saw a net loss of 56,000 total broadband subs with declines of 78,000 in speeds below 20 meg and growth of 22,000 in speeds of 20 meg and above. Within those gains, we added 48,000 in speeds of 100 meg and above. I'll also note that growth in our greater than 100 meg subs is up more than 100% on a year-over-year basis.

Broadband revenue for the second quarter of 2019 grew 1.8% year-over-year which compares to growth of 1.4% last quarter driven by our efforts to increase penetration in our competitive assets and investing in fiber. Voice revenue on a year-over-year basis declined 13% this quarter compared to 12% last quarter. The decline in other revenue continues to be driven by our decision to de-emphasize our Prism video product. Regulatory revenue is down year-over-year due to the adoption of new lease accounting standard.

Turning to adjusted EBITDA on slide 11 for the second quarter of 2019 adjusted EBITDA was 2.269 billion compared to 2.271 billion from the year ago quarter. Adjusted EBITDA margin expanded to 40.7% for the second quarter of 2019 compared to 38.5% in the year ago quarter. We continue to focus on adjusted EBITDA growth and margin expansion as we drive profitable revenue in our transformation efforts. As of the end of the second quarter, we have achieved approximately $290 million of annualized run rate adjusted EBITDA transformation savings. We are pleased with our ability to accelerate transformation savings in the first half of 2019 and feel good about our progress going forward.

Integration and transformation costs and special Items incurred in the second quarter of 2019 impacted adjusted EBITDA by $54 million in free cash flow by 55 million.

Overall, we continue to make progress in taking costs out of the business. Excluding transformation costs and special Items, if you look at our adjusted EBITDA impacting costs for the second quarter of 2019, we have reduced costs on an annualized basis by roughly $1.3 billion compared to where we were a year ago. And $2.3 billion since the close of the Level 3 transaction. The improvement in our cost structure is driven by a combination of synergies, transformation savings and our focus on profitable revenue.

Moving to slide 12, for the second quarter of 2019 capital expenditures were 800 million. For the first half of 2019, capital expenditures increased approximately 10% to 1.73 billion compared to 1.58 billion from the year ago period.

As Jeff just mentioned, we continue to invest in our fiber footprint and product capabilities, positioning us to take advantage of existing and emerging market opportunities. In the second quarter of 2019, the company generated free cash flow of 956 million.

Turning to slide 13, we exited the quarter with our net debt to adjusted EBITDA ratio at 3.8 times which compares to 4.3 times at the close of the Level 3 transaction. We remain highly focused on getting to our 2.75 to 3.25 times net leverage target over the next three years. During the second quarter, we reduced outstanding debt by approximately 700 million primarily through a tender offer open market purchases and term loan amortization. In addition, we recently announced the redemption of $400 million in bonds that will close in late August and we expect to pay down an incremental 400 million of debt at maturity over the next few months.

Overall, at this point we have a clear line of sight to lowering debt by 1.7 billion through actions already taken or that are planned for the rest of the year.

Turning to the business outlook on slide 14, we feel good with our progress in the first half of the year and are reiterating our full year 2019 financial outlook measures for adjusted EBITDA of $9 billion to $9.2 billion, free cash flow of $3.1 billion to $3.4 billion and capital expenditures of 3.5 billion to 3.8 billion.

Please note that we slightly adjusted our outlook for dividends paid and depreciation and amortization. In summary, we remain focused on execution, specifically on improving revenue trajectory for the second half of 2019, maximizing profitability and remain disciplined on our cost transformation and deleveraging initiatives.

With that we'll open it up for your questions.

Jeff Storey -- Chief Executive Officer

Thank you Neel. Operator, would you explain the process?

Questions and Answers:

Operator

Absolutely. [Operator Instructions] Our first question from the line of Batya Levi with UBS. Please go ahead.

Batya Levi -- UBS

Great, thank you. First a little bit more color on the enterprise trends if you could provide for the second half. I believe you typically see higher CPE sales, can you parse out the improvement on regular services versus CPE? And just a follow-up, I believe you mentioned a couple of non-recurring items and iGAM and wholesale in the quarter, any chance you could quantify those? And third, a lot of discussions on potential changes in terms of Qwest [Phonetic] subsidies that you collect Right now, how do you think about that going forward? I believe you collect about $500 million on an annual basis right now, would you still be interested in participating in the auction next year? Thank you.

Neel Dev -- Executive Vice President and Chief Financial Officer

Okay. Batya, I think there are a lot of questions in there. So if I miss any, come back. So on Enterprise, if you think about our Enterprise segment, our sales in fourth quarter and in January and February were impacted by the government shutdown. But we saw good sales in March and we saw a good sales in second quarter of this year. So a good sequential growth themselves, so given timing of installs and that's part of the reason we feel good about the second half of this year this year. On CPE we've really de-emphasize unprofitable CPE, so our CPE revenue is down a fair amount on a year-over-year basis. So, the driver for enterprise growth is really sales and install.

Jeff Storey -- Chief Executive Officer

And just to add, I apologize Neel, on the CPE that's a conscious decision. That's something that we intentionally did. We still sell CPE but we do it when it brings network with it when we can do managed services and professional services, when we can do things to increase the margin around it but in the past, there were times when we would just sell CPE without any of those other services and we've stopped doing that. That doesn't make us money, distracts our organization and that's one of the efforts around profitable revenue that we've focused on.

Neel Dev -- Executive Vice President and Chief Financial Officer

Yes and if you just put it in terms of context, I think if you look at our Enterprise year-over-year, we are down about 1.2% that's about $18 million and last year we terminated a government contract that was unprofitable, we de-emphasize low margin CPE cells and we put a lot of guard rails around profitable business. So in that context, we're fairly pleased with the performance of the Enterprise business and the latter half of the year is driven by sales and installs.

In terms of iGAM, in the first quarter, I noted that we had a larger renegotiation with the customer --hyperscale our customer and that drove a sequential pressure on revenue but we did offset that with non-recurring services, professional services and other things and that was, I call it roughly around 15 million or so. And again in iGAM we saw growth in sales sequentially and we feel good about the second half of the year.

My comment on wholesale one time was more related to the comment I made in the fourth quarter, we had a large carrier renegotiation in the first quarter that impacted revenue and we saw the full quarter impact of that in second quarter. And if you're looking at year-over-year for wholesale second quarter of last year at a large carrier settlement that impacts the year-over-year comparison.

Jeff Storey -- Chief Executive Officer

And then with respect to the CAF question and whether we will participate in the upcoming auctions, the suggested rules have just come out, we've got a comment period I think till the end of the year, we'll look at it and we'll see if it makes sense and if it does for us and we'll participate in those auctions and if it doesn't make sense then we won't. If you look historically there were some times we participated and sometimes we didn't. And so we will evaluate that as the rules get finalized and as we look at the specifics.

Neel Dev -- Executive Vice President and Chief Financial Officer

Yes. And other thing just to add to that and then keep in mind on CAF, there is a capital offset as well. So to the extent that we were not getting funding at the revenue line, we're also not spending capital.

Batya Levi -- UBS

Right, OK. Thank you.

Operator

Our next question is from the line of Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery -- Morgan Stanley -- Analys

Great. Thanks a lot. Thank you for the color on the fiber deployment. Can you just give us a sense of how much that is costing and what timeline is to get to completion there and maybe any thoughts about, is this capital intensity likely to continue into 2020? And then any comments on M&A opportunities, I think you've talked about tuck-ins and maybe some international opportunities over time but we haven't seen you do much for a while. And any color on what you might be interested and that would be great. Thank you.

Jeff Storey -- Chief Executive Officer

Sure. With respect to how much capital, we haven't given out any of that information what I will tell you is it's fully contemplated in our 2019 capital outlook that we provided and it's part of the growth initiatives that we talked about over in previous earnings calls and the completion is the end of 2021, the majority of that long delay has to do with Europe and North America I don't have the exact date in front of me, but it's not a network where you got to wait until everything is turned up we prioritize the routes based on the demand from our customers. We will activate those routes. We are in the process of activating them we've installed the fiber. We will continue to do that based on the prioritization that our customers want.

So we're really pleased with our ability to roll this out very quickly. If you have a network that is direct buried into the earth it cost you an enormous amount to open a new tranche. It cost you an enormous amount of time to get all the rights, of way and all of that and what we do is we rod and route the conduit, we pull the fiber directly into the conduit, it's very simple, very straightforward and very cheap compared to the alternative. So we're really pleased to use our our very extensive conduit network to take advantage of that.

With respect to M&A, we don't really talk about M&A before we do something. We will continue to be active and looking we're an acquisitive company, we will make sure that anything we do is accretive to the business and free cash flow basis and functionality basis. And so we'll continue to look at that but right now our real effort is transforming CenturyLink and looking at the way that we interact with our customers and creating an environment where we can do seamless things. I mentioned in the in the prepared remarks, our dynamic connections. Dynamic connections for Enterprise customers allow them to establish connectivity with us and then use that connectivity by typing in a few keystrokes to either increase the speed a redirect it from one cloud service provider to another or one of their data centers to another and really gives them the flexibility to use that in a digital way.

The next step of that obviously is to create connection between their systems and our systems where their AI tells us to automatically upgrade that capacity or do something and so that's really the effort of ours over the next couple of years and so there is some tuck-in type ideas that might make sense to go with that. But we don't talk about any specifics until we do something.

Simon Flannery -- Morgan Stanley -- Analys

Great. Thanks, Jeff.

Jeff Storey -- Chief Executive Officer

Sure. Thank you, Simon.

Operator

Our next question from the line of Philip Cusick with JPMorgan. Please go ahead.

Philip Cusick -- JPMorgan

Hi guys, thanks. I guess two, first on the consumer side recognize you don't want to talk about strategic options. Can you tell us if you ruled anything out at this point or things that you may have talked about ruling out back in May. If those have possibly come back to the fourth? And then second with the fiber build can you expand on your plans from here or around metro and long distance fiber and how that fiber build may have impacted any dark fiber bookings and how we should think about that going forward? Thanks very much.

Jeff Storey -- Chief Executive Officer

Sure. I got distracted. On the consumer at first, I don't know anything that we might have said in May. So if there is something specifically. I've said, remind me of it but no and answer your question and I won't take any more questions on the consumer process just because it's still early in the process and I don't have any real updates. But we haven't ruled anything out we're open minded, and we think that it's important for us to look at all options and including continuing to own and operate it and so we're open to all of the various options and really just trying to understand the best way to maximize free cash flow per share for our shareholders over the long time.

And then the second question was on the overbuild and the impact that has on dark fiber. Is that right?

Philip Cusick -- JPMorgan

Correct. Thank you.

Jeff Storey -- Chief Executive Officer

Yes, I think it has great impact on dark fiber. we are quietly, a very large dark fiber sales company. We don't emphasize it that much externally but we love it. We have great customers this ultra-low loss fiber is important to our dark fiber customers and some of our dark fiber customers not all of them that hyperscalers I mentioned large enterprises that have huge bandwidth requirements and then again some of our dark fiber customers that are trying to serve their own needs internally. And so we think it will be, we think it's a real opportunity for us.

Philip Cusick -- JPMorgan

Thanks, Jeff.

Jeff Storey -- Chief Executive Officer

Sure.

Operator

Our next question is from the line of Brett Feldman with Goldman Sachs. Please go ahead.

Brett Feldman -- Goldman Sachs -- Analyst

Thanks. And just a follow up on something you were discussing during your prepared remarks. Jeff, you talked about low-calorie revenues and how you've been weaning the company off of products and services that weren't helpful to the bottom line for a while now, I still think your current period topline results are being compared against prior periods or maybe there was more of that in the mix. So I guess I'm just trying to understand, do you think you've hit a lot of the significant opportunities to maybe get the mix from a profitability standpoint where you want to be so that maybe you will have better visibility into sort of the true organic trajectory of the business or do you still have more of this, you want to do, And then just overall I'd be interested in hearing your thoughts on the enterprise and I iGAM demand environment, I feel like we've gotten mixed messages from some of your large peers about what the market environment is like. And I'm curious, the extent to which the demand backdrop is influencing your view on where the second half of the year is going to shape out? Thanks.

Jeff Storey -- Chief Executive Officer

Sure, I'll answer the low-calorie and then let Neel add any specifics he wants to do. I think it's getting behind us. There is not any super major, low-calorie revenue that we're targeting today. In the consumer business, we said we're going to de-emphasize the Prism linear TV, we have deemphasized contracts and gotten out of contracts that we thought we are underwater. We stop selling CPE, a lot of that is still in the year-over-year comparisons, Brett. So that makes it kind of difficult but if you start looking at the sequential comparisons, it will be in there less than less. So I think that going forward we'll stop talking about that even though they're going to be some here and there that affect us. The other thing that we're trying to do though is with some of this low-calorie revenue, we're trying to increase the profitability by moving things off-net to on net and then we will do rate hikes and if we can -- if we can make it profitable then with rate hikes then the customer may leave us.

But those are small things around the edges, I think it's starting to fall out of the year-over-year comparisons, but it's going to be faster falling out of the sequential comparisons.

Neel Dev -- Executive Vice President and Chief Financial Officer

Yes, just to add a couple, it really is around the edges, Brad, I think if you look in the product breakdown for other, for example, in Consumer that's where a lot of the Prism revenue is so sequentially it was down 6 million to 7 million, so that will continue. If you look at our IT and managed services products that's where we have some of the legacy hosting, if you will, and some of that will continue to do a trip. So it really is around the edges and that was part of the reason why we talked about in our Enterprise and iGAM growth. We said, second half will be higher than first half because first half is relatively clean compared to last year where we were working through a lot of that.

Jeff Storey -- Chief Executive Officer

And with respect to iGAM, Enterprise the demand environment that we see look, we love this business, we think there is great demand out there for the types of products and services that we sell and that the demand is growing for those types of products and services. Now there are some products that are going to decline as customers transitioned at us and transition to the newer products and services. And we think that's a good opportunity to go out and take share from other people and help those customers make that transition. So we think market is good for us. We think we have great assets and great network capabilities, we want to continue to expand that and augment it adding 4500 buildings in the first quarter gets us to more customers. Adding 5,000 buildings in the second quarter gets us to more customers. It gives us a better footprint to deliver those services on. We know when we sell on net, we do a better job for the customer, we make more money, it's all around a good thing and so we look at the market.

And I've said this for a long time whether it's the market or the economy, we look at it and say, it's up to us to execute, the CenturyLink execute in the way that we can with the network assets that we have with the capabilities and the products and services and the managed services and all of those things, if we invest appropriately for growth continuing to augment our capabilities, we win. And so I don't really have any great comments on the market other than it's good for our products and services.

Brett Feldman -- Goldman Sachs -- Analyst

Thank you.

Operator

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

Frank Louthan -- Raymond James -- Analyst

Great, thank you. Walk us through the current pricing in wholesale in general and then I know you said you're not going to be touch so much on M&A, but are there other assets possibly that you might want to divest, to try and help with leverage. Maybe data centers are CDN business, something like that?

Jeff Storey -- Chief Executive Officer

So I'll take the second question then Neel can talk about the pricing. As I said in the previously in the answer and in the prepared remarks, we look at everything, and we are not opposed to evaluating each individual business that we have each individual line of business and we will continue to do those types of things and there is nothing I want to call out. But there are some things that we're actively looking at and have been since over the past several months and we'll continue to do that. One of the things you got to do is you got to have a willing buyer and a willing seller. And we're in the process of figuring out. First of all, if we're willing seller, and secondly if there is a willing buyer out there, and that what we do know is that regardless of the particular product or the particular line of business, if we focus on growing free cash flow and we have options to whether we want to keep it or not keep it. And so every part of our company, we are looking at how do we get it to contribute free cash flow. And if we don't think we can for example, the Prism TV if we don't think we can get it to contribute the level of free cash flow that we want, we'll stop doing it.

Neel Dev -- Executive Vice President and Chief Financial Officer

On the pricing side Frank, I would say, overall in the wholesale, I think your question was specific to also. We see rationale behavior and we follow the market fairly closely for access particularly we see areas where others are raising prices. So we started to stay competitive but if there is an opportunity to raise prices we raise, if there are multiple competitors and we need to lower prices we do. But overall, we think the return profile, given the current pricing looks very good. And part of our business as a wholesale voice business, in wholesale and we manage that as a trading desk on an everyday basis. So that's all based on margins. So we really don't care about the top line there, we have guardrails around what margins we want to make on a per minute basis and we manage that like a trading desk.

Frank Louthan -- Raymond James -- Analyst

Okay, great, thank you very much.

Operator

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

Nick Del Deo -- MoffettNathanson -- Analyst

Hey, thanks, for taking my questions. At first, the building additions you've noted the past two quarters have been pretty substantial. Can you talk about what share of those adds are primarily driven by efforts to move off-net traffic on-net for existing customers versus buildings that you otherwise targeted. And should we think of this pace as what you can sustain for the next several quarters?

Jeff Storey -- Chief Executive Officer

First of all, thank you for noticing that is substantial because we're working hard and I will tell you that we prioritize buildings for off-net to on-net, we prioritize them for free cash flow. I hate to keep using the same phrase but it actually the driving factor behind our company and so off-net to on-net is a guarantee and we know it existing sales is another way that we prioritize them and there is not quite not all that many that we do a build it and they will come type approach. That's very, very rare and so the addressable market or opportunity for us to remain at this pace and I can't predict how long but it's going to be driven by as long as we're finding buildings that we can profitably build into that make us some money, we will continue to do that.

And it's not a limiting factor of our ability to turn those buildings up, the limiting factor over the long-term will be what types of returns do we get for each of those buildings and right now we're very pleased with it. So I can't give you a prediction of how long it will last but I will tell you is that when we look at our capital outlook, we factor in these building adds as well. So as you look at our capital outlook and you think about it for the year, whether it's long haul, ultra low loss fiber whether it's Edge computing expansions or building adds that's factored into our capital outlook.

Nick Del Deo -- MoffettNathanson -- Analyst

Okay, got it. And then, Jeff, you noted in your prepared remarks you are focused on customer satisfaction and kind of along those lines, can you share any details regarding what churn trends have been like in the business?

Jeff Storey -- Chief Executive Officer

Yes so qualitatively the churn has been pretty good, especially year after an acquisition we're pretty pleased with the churn and that tells us we didn't do anything wrong in working with our customers and then say you necessarily did everything right but it tells you didn't do anything wrong. And if you look at our churn across the business broadband subs in consumer although there is seasonality in the second quarter typically, if you look at year-over-year second quarter, we're pretty pleased with our overall churn. Enterprise, wholesale, wholesale we've described for a long time to be flat to slightly down, and it's going to continue at the trends that it is just the nature of that business but we manage it again, we manage it pretty heavily for margin and for contribution.

Nick Del Deo -- MoffettNathanson -- Analyst

Got it. All right, thanks, Jeff.

Jeff Storey -- Chief Executive Officer

Thank you, Nick.

Operator

Our next question is from the line of Tim Horan with Oppenheimer. Please go ahead.

Tim Horan -- Oppenheimer -- Analyst

Thanks, guys. Do you think this is kind of peak revenue declined year-over-year at this point? Or can you give a little bit more color. I know you gave two line item plan revenue declined for the second half of the year. And maybe, obviously there's a lot of moving parts and you're throwing a lot of money yet putting infrastructure in place that leverages a lot of your existing infrastructure was a really, really smart move and de-emphasizing obviously a lot of legacy policy we're talking about in. Any color on when you can get to break-even on revenues? Thanks.

Neel Dev -- Executive Vice President and Chief Financial Officer

So I think, Tim, I think the year-over-year gets complicated because of all the noise last year and then if you think back to fourth quarter of last year, we have the noise, but then we also add strengthen a lot of nonrecurring revenue items that we called out in our fourth quarter earnings call. But in general, I would say, if I look at the first half of this year compared to that to first half of last year, more than a third of the revenue decline is driven by a lot of actions we took whether its Prism on profitable, in iGAM contract, profitable government contract, de-emphasizing CPE, etc.

So like Jeff mentioned earlier, we don't have a lot more allow to go. So going forward, the comparisons are going to get more cleaner and in terms of trajectory, I think, like we said, we feel good about iGAM and enterprise SMB, the challenge we have is there still has a fair amount of legacy voice. Our sales actually grew sequentially, second quarter over first quarter while we need a lot more improvement which we think we have the addressable market and we're focused on growing sales. So again, at some point offset some of the legacy declines.

Jeff Storey -- Chief Executive Officer

And I am very focused in Lisa Miller, who runs that business unit, is very focused, on selling to small and medium business in buildings outside the legacy CenturyLink footprint. Level 3 never focus there, because that's the type of customer we focused on. CenturyLink never focus there because that's not the type of -- we didn't have the network to sell to those customers and so neither side of the previous companies focused on those, that's a great opportunity for us. We have to stay focused and we have to really drive our opportunities outside of the region for those customers.

Neel Dev -- Executive Vice President and Chief Financial Officer

And one other comment I would add is on the consumer side, if you look at our broadband business, we're investing in that business we're focused on the comparative asset, broadband revenues grew year-over-year. This quarter, it grew year-over-year, last quarter and I think it grew year-over-year all four quarters of last year and we're going to continue to focus on that business and also focus on expanding the margins for those business that business like Jeff mentioned in terms of how we interact with customers with self-install and digital interaction etc.

Tim Horan -- Oppenheimer -- Analyst

So maybe just one more question, sorry. How about on the free cash flow front? Do you think the next couple of years ago you obviously have a lot of moving parts of the business model. But do you think free cash flow to be relatively stable at this run rate over the next few years kind of grow or should we expect some declines with all the moving parts?

Neel Dev -- Executive Vice President and Chief Financial Officer

So look, I think we'll have more to say about next year's free cash flow when we get to that point but directionally our objective is to continue to grow EBITDA and we feel good about that.

From a capital standpoint, like Jeff mentioned, a lot of these investments that we're making are within the existing envelope. So if you look at our current capital guidance, I think it's factored in there. In fact, a lot of the fiber deployment, spending was last year when we spent only $3.2 billion. So we're going through a massive effort in terms of reorienting in terms of where we spend capital. So we're not spending capital in areas that we don't think we are getting a return and really focused on long life investments. So I think that's all factored into our capital and if you think about net cash interest with our deleveraging efforts and given the interest rate environment that should improve. So just to give you a flavor for where free cash flows added.

Tim Horan -- Oppenheimer -- Analyst

Thank you.

Operator

Our next question from the line of David Barden with the Bank of America. Please proceed.

David Barden -- Bank of America -- Analyst

Hey guys, thanks for taking the questions. I guess just a couple of-- Neel, on the mathematics of getting better second half out of Enterprise and iGAM, especially for enterprise it suggests a pretty healthy kind of U turn in the business at least the third quarter if not the fourth. And my guess is that you mentioned a few things that gave you conviction on there, you mentioned sales funnel in particular, I think both you mentioned it. But I imagine mid-third quarter now we've got to be on the install part of that kind of process and I was wondering if you could kind of elaborate a little bit if the conviction that you're having on the second half being better than the first half is coming from that installation process and the fact that things are actually happening on the ground, especially if there was that $15 million one-time international.

The second question was on the math of the transformation program that the quarter-to-quarter change from 1Q to 2Q would suggest we're on track to be at a $600 million run rate by the end of the year and I was wondering if you could kind of elaborate on whether that's realistic, and if it is kind of the pieces parts that will get you there? Thanks.

Neel Dev -- Executive Vice President and Chief Financial Officer

Sure, David. So on Enterprise, you're right, a big part of that is installs because like I mentioned I think a big sales ramp came up in March and then, second quarter was a good quarter of sales for enterprise. But given the nature of customers in that segment, some of these deals are large deal, several hundred node network. So it takes a while to get those installs and so yes, we need to execute on all the installs and then there is the sales funnel which we feel good about, but that will impact more of fourth quarter. So the third quarter impact improvement in revenue will largely be driven by installs.

And similar on the iGAM front as well and so, yes, the leading indicators were positive about. On the transformation front, we were able to accelerate and -- but I think it for the second half of the year, I would say if you look at our overall guidance of $800 million to $1 billion over three years with 10 more quarters to go, I would think about it as $50 million to $70 million per quarter is kind of the baseline but at the end of the day, if we can accelerate, we will, but we're not banking on accelerating.

David Barden -- Bank of America -- Analyst

Great. Thanks so much, guys.

Operator

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

Mike McCormack -- Guggenheim -- Analyst

Hey guys, thanks. Just maybe a quick comment just on the overall fiber capacity. Obviously, a lot of us moved through the early 2000s with the fiber drop that occurred back that and the new technologies coming to market but how do you frame the current sort of capacity situation with respect to the domestic fiber networks? And then secondly for Neel on the leverage side, obviously we still have a lot of EBITDA coming out of the legacy revenue streams. Just trying to get a sense for how you sort of bifurcate those streams and whether or not it's more accessible to have maybe a higher threshold of leverage some of the newer stuff and perhaps a little bit lower on the legacy declining revenue streams? Any thoughts or not would be great. Thanks.

Jeff Storey -- Chief Executive Officer

Yes, so on the -- I have not had a fiber glut question in years. So Mike, thanks for the we're not, if you think back to 2000 and 2002 when there was a glut of fiber, it wasn't the glut of fiber? It was a glut of fiber providers and so we had Level 3 and Quest and WilTel and Broadwing and IXE in all of these companies going out and building the same assets between the same locations and then they started getting into trouble and when you get into trouble, the next dollar revenues lease to another dollar of revenue. So, you get irrational pricing. We don't have that today we don't have a glut of fiber, obviously we wouldn't be augmenting fiber. If there is a glut in the industry, we don't have a glut of competitors out there. There are a lot of good fiber competitors, a lot of good companies but for the most part, it's a rational market and we're building fiber where we need it. I don't worry about a fiber glut. I don't worry about some irrational player selling fiber for ridiculous prices. It's a fairly rational market, it's a competitive market, but it's a fairly rational one. So I'm pretty pleased with where we are, don't worry about not worry about that much.

Neel Dev -- Executive Vice President and Chief Financial Officer

So, clearly those are painful days.

Jeff Storey -- Chief Executive Officer

There were painful day for all of us.

Neel Dev -- Executive Vice President and Chief Financial Officer

So Mike I'll shot at your question, I'm not sure I completely understand it but come back if I don't address it. So the way we think about it is we are -- first of all we are deleveraging. So we feel good about that plan. In terms of all of our investments, they are gone on big chunk of that if you hear our commentary and what we're focused on is really on long life asset primarily fiber with supports different technologies and what we're working on is really transitioning from the legacy EBITDA to a newer services on that, right. So, and that will be an ongoing process, and as an industry for some of us that have been in this industry for a really long time, we've gone through that transition several times. And so we're managing that and at an aggregate level in terms of what leverage makes sense. And we don't really think about it in the piece parts, if that makes any sense.

Mike McCormack -- Guggenheim -- Analyst

Yes, Neel I guess there is a sort of thinking about it as that transition occurs does that, not so much obviously this year but longer-term leverage ratio would have changed that dynamic for you obviously legacy Level 3 was a bit more highly levered?

Neel Dev -- Executive Vice President and Chief Financial Officer

Yes, yes. But for the near term, I think the range we feel good with the 2.75 and to 3.25 we feel very comfortable with that. And if we get to a different dynamic, then we'll give it some more thought.

Mike McCormack -- Guggenheim -- Analyst

Great, thanks guys.

Jeff Storey -- Chief Executive Officer

Thank you, Mike. Before we finish, I think that was the last question. So before we finish the call, I'd like to wrap up with a few key points. We remain focused on growing adjusted EBITDA and expanding margins. We delivered on those objectives again this quarter, while also focusing on improving the customer and employee experiences with a solid quarter of sales and a strong funnel we seen signs of improving revenue performance and expect a better second half of the year for iGAM and enterprise.

We continue to evaluate strategic options to create value with our asset portfolio. In the meantime, we're working diligently to operate the business for growth maximum efficiency and long-term return of free cash flow per share. We're excited about the investments we're making to continue to enhance and expand our fiber network and to solve our customers evolving networking needs like Edge computing. We continue to make progress toward our deleveraging objectives and expect to meet our leverage target within our three year timeframe.

And finally before I conclude the call, I remind you that as always our guiding principle is growing free cash flow per share every action we take and every option we review is in the context of that metric.

Thank you all for joining today's call and for your continued support of CenturyLink. France, that concludes the call.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Valerie Finberg -- Vice President of Investor Relations

Jeff Storey -- Chief Executive Officer

Neel Dev -- Executive Vice President and Chief Financial Officer

Batya Levi -- UBS

Simon Flannery -- Morgan Stanley -- Analys

Philip Cusick -- JPMorgan

Brett Feldman -- Goldman Sachs -- Analyst

Frank Louthan -- Raymond James -- Analyst

Nick Del Deo -- MoffettNathanson -- Analyst

Tim Horan -- Oppenheimer -- Analyst

David Barden -- Bank of America -- Analyst

Mike McCormack -- Guggenheim -- Analyst

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