CenturyLink Inc. (NYSE: CTL) Q4 2019 Earnings Conference Call
February 12, 2020
Corporate Participants:
Valerie Finberg — Vice President of Investor Relations
Jeff Storey — Chief Executive Officer
Neel Dev — Executive Vice President and Chief Financial Officer
Analysts:
Alexis Roper — Morgan Stanley — Analyst
Tim Horan — Oppenheimer & Company — Analyst
Batya Levi — UBS — Analyst
Philip Cusick — JPMorgan — Analyst
David Barden — BofA Merrill Lynch — Analyst
Nick Del Deo — MoffettNathanson LLC — Analyst
Brett Feldman — Goldman Sachs — Analyst
Michael McCormack — Guggenheim Securities — Analyst
Presentation:
Operator
Greetings, and welcome to CenturyLink’s Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions] Afterwards, we will conduct a question-and-answer session. [Operator Instructions]
It is now my pleasure to turn the conference over to Valerie Finberg, Vice President – Investor Relations. Please go ahead.
Valerie Finberg — Vice President of Investor Relations
Thank you, France. Good afternoon everyone, and thank you for joining us for the CenturyLink fourth quarter 2019 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’d like to call your attention to our Safe Harbor statement on Slide 2 of our 4Q ’19 presentation, which notes that this conference call may include forward-looking statements subject to certain 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 the earnings press release or the supplemental schedules on the CenturyLink website. 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 everyone for joining us. On today’s call, I’ll provide a recap on our progress in 2019 and how we’re thinking about 2020 and beyond. Neel will provide an overview of our financial results and then, we’ll go into your questions.
We made good progress in 2019 transforming and positioning our business for the future, while also delivering on our near-term objectives and meeting the guidance targets we provided at the beginning of the year. As I look back over the past two years since the close of the Level 3 transaction, simply put, we’ve done exactly what we said we were going to do.
As you can see on Slide 4, in 2018 and 2019, we met or exceeded all of the outlook measures we provided. We delivered two consecutive years of growth in adjusted EBITDA and two years of expanding margins. We also exceeded our integration synergy targets in 2018 and are well on our way to achieving the deleveraging and transformation cost savings targets we shared with you in 2019.
We have significantly ramped our free cash flow from pre-merger levels last year, as we said we would. We grew Enterprise and IGAM revenue in the second half of 2019 compared to the first half of 2019. We still have a lot of work ahead, but I’m proud of the work our team has done. And we will remain focused and financially disciplined as we continue to drive our transformation.
You’ve heard me say many times that our focus is on driving growth in both profitable revenue and free cash flow per share. Our strategy is fairly straightforward. And our 2019 capital investment program focused on three primary areas, enhancing our product capabilities to meet the changing technology needs of our customers and the digital interactions they seek; increasing the size of our addressable market by continually expanding our fiber footprint; and improving our customer experience and reducing our cost to operate through simplification and automation. I’m pleased with the progress across all of these dimensions.
As an example of expanding our addressable market, in 2019, we built fiber to approximately 18,000 additional Enterprise buildings, bringing our total count to around 170,000 fiber-fed on-net locations. We’ve prioritized fiber deployment for consumers over previous investments in copper-based technologies like bonding and vectoring. We now have enabled more than 2 million fiber households, a number we expect to continue to grow. And we’re making it easy — easier for our consumer customers to access these networks by standardizing our product set and enabling a digital environment. That digital environment allows customers to immediately initiate service using automated and seamless provisioning processes. In turn, this lowers our cost to operate and improves our customer experience. This type of transformation creates a virtuous cycle. We optimize our capabilities to reduce costs, which drives a better customer experience and happy customers buy more and churn less.
Beyond our capital investments, we continue to take steps to improve the profitability of CenturyLink’s base business. We are slowly eliminating our linear video products and shutdown initiatives to create a streaming video product. We continue to groom our enterprise customer base to identify and exit low-margin contracts. We have deemphasized low-margin CPE sales. We still sell CPE, but only in the context of larger network-centric and professional services deals. These moves, obviously, had a negative effect on revenue, but had a positive effect on free cash flow generation. We believe the majority of this low-quality revenue grooming is now behind us, but we remain disciplined with our focus on profitable revenue growth.
We’re also very active in grooming low-margin off-net circuit onto our own fiber facilities. This is a long slow process though. From a pure cost perspective, we achieved $850 million in run rate integration synergies in 2018 and are well on our way to achieving the $800 million to $1 billion in transformation efficiencies we announced in 2019. We will continue to streamline our operating model and believe we have significant opportunities to continue to transform CenturyLink in the future.
I’d like to cover one last highlight from 2019 before I discuss 2020. Turning to Slide 5, at the beginning of last year, we modified our capital allocation strategy to focus on three priorities. Increased capital spending to drive growth in the business. As examples, the addition of the 18,000 new on-net buildings I mentioned brings more customers’ locations on-net and gives us a strategic advantage and the better customer experience. Investment in our Edge capabilities, coupled with our deep and extensive fiber network places us at the forefront of the low latency, high transmission rate world of edge computing. Upgrading our global network with the largest deployment of ultra-low loss fiber positions us well to continue winning in the long-haul fiber market, especially with hyperscale customers. Expanding our consumer fiber footprint enables growth in our high-speed broadband offerings. And lastly, as I just discussed, we believe investing in the transformation of our quote-to-cash platforms not only drives operating efficiencies, but also improves our customer experience and supports our revenue growth initiatives across all of our customer segments.
Our second objective was to reduce leverage with a target of 2.75 to 3.25 times over three years. We reduced debt in 2019 by a little more than $2 billion. In addition to leverage reduction, we’re taking advantage of our improved balance sheet and strong capital markets to lower our cost of capital and reduce interest rate risk. Neel will provide additional detail, but I’m very pleased with this work and believe it should drive improved equity value over time.
Finally, we believe our dividend is a key part of our value proposition, and we returned more than $1 billion in dividends to shareholders in 2019. We remain committed to our capital allocation strategy. And in 2020, you can expect to see us continue to invest in the business for growth and further reducing leverage. Our dividend policy is unchanged, giving us what we believe is a very manageable payout ratio in the 30s.
Turning to 2020 in Slide 6. I’ll discuss our 2020 priorities. You’ll notice they look a lot like our 2019 priorities, which by the way is what disciplined to a plan looks like. First, we want to continue to transform our operations to improve both the employee experience and the customer experience. Second, we want to continue to invest in growth through fiber deployment and enablement of fiber-related products and services, such as embedded security, Dynamic Connections, cloud application management and edge computing. Third, grow adjusted EBITDA through ongoing improvements in sales, operational efficiency and financial discipline. And fourth, continue to progress toward our 2.75 to 3.25 leverage target. Neel will cover the details of our financial outlook for 2020.
As we look to 2020 and beyond, we expect our revenue trajectory to continue to improve. While we do not expect these improvements to be linear, we do expect better performance over the course of the year, and we will remain disciplined in our pursuit of profitable revenue. As you know, we don’t provide a forward-looking outlook for revenue, but we understand the importance of growing revenue, and we are very focused on that as a key objective.
I’ll briefly walk through commentary for each of our business groups. I’ll start with IGAM. As a reminder, our International and Global Accounts business encompasses our operations in LatAm, EMEA, and APAC, as well as our Global Accounts team, which serves a little more than 200 customers, customers primarily based in North America, but that operate on a global scale. These 200 customers aren’t necessarily our largest customers by revenue that their needs match our global capabilities and they represent opportunities for growth. The IGAM business showed improvement in the second half of 2019. And we believe we can leverage our investment and market position to drive continuing improvement.
Moving to our Enterprise segment, which includes both large and regional enterprises generally for companies with more than 500 employees, as well as our public sector group that includes all domestic federal, state, local and research and education customers. In addition to ours ubiquitous fiber network, I’ve long been a believer that operating locally is a key differentiator. Our local market strategy leverages about 25 teams of general managers, account managers, sales engineers and sales support that are locally positioned in key markets across the country. These local teams worked directly with and know our customers and their markets. As many of our competitors have pulled back from a local model, we have continued to lean into it, creating what we believe is a distinct advantage for CenturyLink. This locally focused customer-centered model, together with our far-reaching fiber network and the ability and willingness to effectively deploy capital to meet our customers’ communications challenges, are leaving an increasing number of customers to select CenturyLink.
For example, the Texas Rangers announced in 2017 that they were planning to build a new and closed ballpark to be ready for the 2020 baseball season, a ballpark that would require a new technology designed to meet the needs of the team and the fans. They were focused on creating a one-of-a-kind-of-experience for everyone at their home baseball games and additional events they hold throughout the year. The Rangers selected CenturyLink to support their smart stadium vision based on our multiple product capabilities, including our smart venue offering, professional services and hybrid networking portfolio, all riding over CenturyLink’s diverse fiber connectivity into the stadium.
Looking specifically at the public sector portion of our Enterprise segment highlights what I see as one of the key benefits of the combination of the CenturyLink and Level 3. While both companies had a share of the federal business, we are seeing that the combined networks, together with our hybrid networking and other capabilities, have made us more competitive and are enabling us to win more new business than either company was able to do on its own. And if I may brag a bit, I also believe we have the best federal team in the business.
I’ll give you a few points that illustrate our growing success. After being selected as the first telecommunications provider to be awarded the authority to operate under the new EIS program, CenturyLink was then awarded the very first contract under EIS to provide core network services for NASA. We also recently announced a significant win with the Department of the Interior with a task order worth up to $1.6 billion over an 11-year period, what is even more significant is the DOI business was previously provided by a competitor.
We’ve also recently announced wins with the Social Security Administration, the Department of Defense Education Activity network and the Census Bureau. We are excited about these wins, and we will continue to pursue growth in the public sector space, although I do want to caution that government contracts generally take several years to ramp. Our success with the federal government demonstrates what a skilled sales and support organization can do with a world-class network and leading-edge products. As with the various government entities, we are bringing the same capabilities to our Enterprise and IGAM customers.
Turning to SMB, we continue to see mixed results from this segment and — as revenue pressures from legacy services is far more than offsetting growth from new services and our expandable addressable market. However, we believe we can, ultimately, grow this segment and are investing in the products and platforms that are aligned to the unique needs of these customers. Our aim is to bring these customers the power of our network, security and other related services by enabling platforms to support high volume, frictionless transactions and make it easier and more efficient for these customers to access our capabilities.
You can expect to see us continue to invest in fiber to multi-tenant environments and focus on taking share where those investments are made. To complement this investment and the ongoing simplification of our SMB operating model, we are streamlining, while at the same time, enhancing our product portfolio to enable solutions tailored for the small and medium business market. This includes products like Unified Communications-as-a-Service, embedded security and simplified WAN offerings, all that are seamlessly delivered and scalable based on the individual customers’ needs. As I said, we’re not yet where we expect to be in the SMB segment, but I’m optimistic about our ability to improve performance over time.
Our outlook for the Wholesale segment is largely unchanged, and we continue to expect revenue to decline primarily driven by ongoing industry consolidation and technology evolution. However, technology evolution also gives us opportunities, and we are working closely with our wholesale customers to support their 5G initiatives as our expanding fiber footprint is a natural match for their needs.
Within the Consumer business, 2019 was somewhat of a transitional year that highlighted two areas of focus, the focus on fiber as the premier last-mile access solution outside of our CAF II markets and the ramp down in our linear TV product. We believe our strategy to invest in fiber is paying off. Broadband revenue grew year-over-year, each and every quarter in 2019. While we’ve seen declines in our low-speed broadband subscribers, we’re seeing great results with our high-speed subscribers. From the fourth quarter of 2018 to the fourth quarter of 2019, we doubled the number of subscribers with speeds of 100 megabits or higher and nearly tripled the number of subscribers with 1 Gig and higher. We believe the reason for this growth is the simple fact that fiber to the home, not hybrid fiber coax, not wireless, not even 5G, but fiber delivers the best experience for customers and is the most scalable for future services. As we all know from our own personal experience, consistent, resilient, high-bandwidth connections are essential to today’s consumers.
Finally put, while fiber is in the practical solution in all markets or all neighborhoods, we take share where we invest in fiber directly to the home. We will continue to invest in our Consumer business centered around three primary initiatives, extending our fiber footprint in areas that make economic sense and ensuring we grow where we invest, improving our systems, tools and capabilities to create a simpler digital experience for our customers and to drive efficiencies to maximize cash flow from the declining parts of the business, and completing the cash to build out. In addition, we like the framework we’ve seen over the last few weeks with the RDOF program and believe the FCC has done an excellent job in designing a program to enable access to underserved areas. We believe RDOF is a natural fit with CenturyLink’s network and the robust fiber network capillarity from our CAF II position. We will pursue participation in RDOF where the economics make sense for us.
While we remain an enterprise-centric company, we see clear value in what the Consumer business contributes to CenturyLink. By growing where we invest, driving in — driving efficiencies into our operating model and maximizing the contribution from the declining parts of Consumer, we believe we can effectively manage EBITDA and cash flow contributions from this business.
I’d also like to update you on a couple of other consumer-related items. First, you may have seen several announcements at the end of 2019 of settlements with various attorneys general regarding the consumer billing practices lawsuits. As of last week, we’ve reached settlements with AGs in five States. In the fourth quarter, we took a $50 million charge for consumer-related AG and litigation matters. We continue to maintain our marketing and billing practices where properly disclosed and consistent with widely-used industry practices, but we also saw the benefit of settling these cases to enable us to focus on continuing to improve the business. We still have some ongoing litigation related to the Consumer business, but we’ve made significant steps toward putting these matters behind us.
I’d also like to give you an update on our strategic review of the Consumer business. During our review, we had no preconceived notions or predetermined outcomes in mind. There were no sacred cows. Our goal was to scrutinize the business unit and determine how we could maximize shareholder value over the long term. To that end, we have engaged with parties that are interested in exploring the purchase of all or parts of the business. We also took a look at what we could do — be doing better internally to drive additional value. In this aspect, we confirm several things we already knew.
First, we can continue to improve efficiency in the business. By simplifying our product offers and moving to a more digital experience, we believe we can improve efficiency as legacy revenues decline. Second, we can more effectively penetrate our fiber-fed areas. We still have opportunities within our existing fiber footprint to drive higher penetration rates and are implementing new initiatives to do so. Third, that we should continue to expand our addressable market through further fiber deployment, we win where we invest in fiber-fed neighborhoods. Fiber is a superior solution, and we have demonstrated the ability to take share where we invest. As I mentioned, we are focusing on fiber as our preferred access solution in the consumer broadband market. We remain open to all value-enhancing opportunities and continue to engage with parties interested in transactions or partnership opportunities as we always would. But our focus right now is to continue to expand our fiber footprint, improve the operating model and extract cost from the business, which creates the best long-term value for the Company and for our shareholders under any scenario.
I will tell you that the team here sees the value in our network, platforms, products and our approach to customers, and we are excited about 2020. We hear from our customers that our willingness to invest our differentiated service experience, and our solutions capabilities make a difference in their ability to achieve their goals for 2020 and beyond. We continue to invest in our fiber network to drive greater revenue from our existing fiber infrastructure and invest in simplification and automation of our business, both to take out costs and to improve the customer experience. As we execute on that strategy, we believe we will drive sustainable long-term growth and free cash flow per share.
With that, I’ll now turn the call over to Neel to provide an update on our detailed financial results and the outlook for 2020. Neel?
Neel Dev — Executive Vice President and Chief Financial Officer
Thank you, Jeff. And good afternoon everyone. Before we get into the details of the fourth quarter, I wanted to provide a brief overview of our financial performance for the year, which can be found on Slide 7. 2019 was a solid year for CenturyLink. We met all our financial outlook measures, specifically adjusted EBITDA of $9.070 billion and free cash flow of $3.276 billion. For the full year 2019, we expanded our adjusted EBITDA margin to 40.5% compared to 38.6% for full year 2018, which represents a more than 500 basis point improvement since the Level 3 transaction.
Over the course of 2019 through a series of capital market transactions, we reduced net debt by approximately $2 billion, delevering to 3.7 times this quarter from 4 times for the same period last year and 4.3 times at the close of the Level 3 transaction. Over the last 12 months, we have also refinanced approximately $17 billion in long-term debt, reducing interest expense and extending maturities. And for the full year 2019, we achieved approximately $430 million of annualized run rate adjusted EBITDA transformation savings.
Moving to revenue. For the full year 2019, total revenue declined 4.4% to $22.4 billion. If you look at the year-over-year revenue decline for 2019, we estimate that about 25% to 30% of that decline was driven by actions we took to focus on profitable revenue and a failed sales leaseback accounting change that we described on our fourth quarter 2018 earnings call.
Turning to Slide 8. Total revenue in the fourth quarter declined 3.6% to $5.57 billion. This compares to declines of 3.6% in the third quarter, 5.5% in the second quarter and 5% in the first quarter. As a reminder, in the fourth quarter of 2018, we highlighted that we had about $40 million in non-recurring revenue benefit. USF is up about the same amount this year, compared to the fourth quarter of 2018.
So as you look at the year-over-year percentage change, it is representative of the underlying business. Sequentially, total revenue decreased 0.6%, compared to an increase of 0.5% in the third quarter and a decline of 1.2% in the second quarter. Also keep — please keep in mind the fourth quarter is typically stronger from a seasonality perspective, with the first quarter is when we usually see contract rerates primarily for our largest customers. We also expect a decrease in USF rates by approximately 15% in the first quarter of 2020 relative to the rates in the fourth quarter 2019. As a reminder, this is pass-through revenue we collect for the FCC.
Moving now to our business segments. On a year-over-year basis, International and Global Accounts or IGAM revenue decreased 2.1%. On a constant currency basis, IGAM declined 1.1%. On a sequential basis, IGAM grew 0.6% compared to a decline of 0.3% last quarter. Moving to our Enterprise segment. On both a year-over-year and sequential basis, Enterprise revenue was roughly flat. We achieved our objective of improving the revenue trajectory for IGAM and Enterprise. Currency was a headwind, but adjusting for currency, which primarily impacts IGAM and excluding USF, both IGAM and Enterprise grew revenue for the second half of the year compared to the first half.
SMB revenue decreased 3.3% year-over-year. This compares to a third quarter 2019 year-over-year decline of 6.5%. Sequentially, revenue declined 0.4%, compared to a decline of 0.3% last quarter. Wholesale revenue decreased 7.4% year-over-year. Sequentially, we saw a decline of 3%, compared to an increase of 0.7% last quarter. As a reminder, we had a benefit of $15 million from a carrier settlement in the third quarter 2019. Excluding that carrier settlement, Wholesale would have declined 1.6% sequentially in the fourth quarter.
Turning to Consumer on Slide 9. For the fourth quarter 2019, revenue declined 5.5% year-over-year. Sequentially, revenue declined 0.9%, which compares to declines of 1.3% in the third quarter, 1.7% in the second quarter and 1.8% in the first quarter. Broadband revenue for the fourth quarter 2019 grew 2.1% year-over-year, which compares to growth of 2.3% last quarter. In the fourth quarter, we saw a net loss of 36,000 total broadband subs. In speeds of 100 meg and above, we added 53,000 subs.
Turning to adjusted EBITDA on Slide 10. For the fourth quarter 2019, adjusted EBITDA was $2.278 billion compared to $2.301 billion from the year ago quarter. For the full year 2019, adjusted EBITDA was $9.070 billion, which compares to $9.040 billion for 2018. Despite more than $1 billion in revenue loss year-over-year, we achieved our objective of growing full-year adjusted EBITDA, focusing on profitable revenue and our cost transformation efforts.
For the fourth quarter 2019, capital expenditures were $940 million. For 2019, capital expenditures were $3.628 billion. We ramped up our capex spend by more than $450 million relative to 2018, as we focused on improving revenue trajectory. In the fourth quarter 2019, the Company generated free cash flow of $1.022 billion. For the full year 2019, we generated free cash flow of $3.276 billion.
Turning to capital markets activity on Slide 11. On our fourth quarter 2018 earnings call, we outlined a three-year plan to get to a target range of 2.75 to 3.25 times net debt-to-adjusted EBITDA. Over the course of 2019, we have been very active in the capital markets and through a series of transactions, we decreased net debt by approximately $2 billion. Additionally, since announcing our deleveraging plan last February, we have refinanced $17 billion or roughly half our debt. Our improved credit profile and constructive market conditions have enabled us to reduce interest expense and extend maturities.
Turning to our maturity profile on Slide 12. At the end of 2018, for the five-year period from 2020 through 2025, we had approximately $26 billion of debt maturing. As a result of our deleveraging and refinancing activities, we have reduced maturities by over $12 billion for the same period. For the full year 2020, we expect net cash interest expense in the range of $1.75 billion to $1.80 billion. The midpoint of this range implies net cash interest expense savings of more than $200 million, compared to 2019 and more than $350 million compared to 2018. Our net debt-to-adjusted EBITDA leverage ratio is now at 3.7 times, and we remain highly focused on getting to our 2.75 to 3.25 net debt-to-adjusted EBITDA leverage target.
As of the end of the fourth quarter, we have achieved approximately $430 million of annualized run rate adjusted EBITDA transformation savings. These savings are part of our three-year transformation plan that we outlined last year. Overall, we continue to expect to achieve the $800 million to $1 billion in annualized run rate adjusted EBITDA savings. Integration and transformation costs, and special items incurred in the fourth quarter 2019 impacted adjusted EBITDA by $173 million and free cash flow by $53 million.
Turning to Slide 13 and our outlook for the full year 2020. Please note all outlook measures exclude integration and transformation expenses. For the full year 2020, we expect adjusted EBITDA of $9.0 billion to $9.2 billion and free cash flow of $3.1 billion to $3.4 billion. We expect capital expenditures in the range of $3.6 billion to $3.9 billion. The slight increase in our outlook relative to last year is primarily driven by increased fiber deployments for our enterprise, federal and consumer customers.
In terms of notable items on working capital, we expect cash payments for other post-employment benefits or OPEB of approximately $200 million. As a reminder, our first quarter has typically high working capital use, driven by timing of bonus payments and other prepaid expenses. Also important to note, our free cash flow guidance does not include any discretionary contributions to the pension fund. For 2020, we do not have any required contributions.
In summary, we concluded 2019 with strong execution on several fronts. We improved the revenue trajectory for the overall business. We delivered on EBITDA growth and margin expansion as we successfully balanced investing in our growth products, investing in customer experience and appropriately harvesting our declining products. In addition to interest expense savings, our deleveraging activities and capital market transactions significantly strengthened our balance sheet. With our continued investments in the business, our focus on profitable growth and ongoing cost transformation initiatives, we are well positioned for 2020.
With that, I’ll hand it back over to Jeff.
Jeff Storey — Chief Executive Officer
Thanks, Neel. It’s time to open it up for questions. France, would you explain the process?
Questions and Answers:
Operator
Thank you. [Operator Instructions] Going to our first question from the line of Simon Flannery with Morgan Stanley. Please proceed.
Alexis Roper — Morgan Stanley — Analyst
Hi. This is Alexis Roper on for Simon. I wanted to ask, could you talk a little bit about the impacts from the large contract when you’ve been announcing and how they expect to kind of ramp over time?
Jeff Storey — Chief Executive Officer
Yeah. In their [Phonetic] terms, your last part of the question is exactly right. They ramp over time, especially with the federal government. These are — we’re awarded multi-year contracts that anticipate future services. We did task — we did an overall task order for that, but then we received individual orders along the way, and we’ll get them spread out over time, and they will turn up over time. Some of the things are more urgent. So for example, on the 2020 Census, that had a timeline associated with it. And — but in general, they ramp just over a fair amount of time.
Alexis Roper — Morgan Stanley — Analyst
Great. If I could ask another question, could you talk a little bit about churn risk or opportunities from the pending wireless merger, potential Dish Network build?
Jeff Storey — Chief Executive Officer
Sure. If Dish Network builds out, then we look at that as a great opportunity for us to go win a new customer and help them in support of their 5G rollout or their broadband network, wireless rollout. If you look at T-Mobile and Sprint, if that ultimately goes through, which it looks like it will, but if it ultimately goes through, we have great relationships with both companies. We’re a key provider to them in both companies. There’s always upsides and downsides in their expansion into 5G and expansion into other markets. It represents an upside, but we’ll have to just look at it over time. We’ve gotten really good at industry consolidation and winning business with our wholesale partners as they go out and buy other companies. And so, we just look at it as an opportunity to find where we’re the right solution for those providers.
Neel Dev — Executive Vice President and Chief Financial Officer
And just to add to the contract question, I think just to provide a little bit of additional color, these contracts usually have a very long tail. So from our return perspective, we’ve seen they’re very good for us, but it takes a while to ramp. So if you think about the contracts in 2020, the impact will be from a revenue perspective will be in the lower tens of millions in year one of these contracts.
Alexis Roper — Morgan Stanley — Analyst
Thank you very much.
Operator
Our next question is from the line of Tim Horan with Oppenheimer & Company. Please go ahead.
Tim Horan — Oppenheimer & Company — Analyst
Thanks, guys. And congratulations on a great year. Can you talk a little bit about the booking trends and a little color around that? And maybe related to that, just a demand for fiber broadly speaking, we are seeing some incredible build-outs by a lot of these hyperscale companies and others. Are you able to leverage a lot of your existing fiber with some of the demand out there and same for existing condos or any other infrastructure you have? Thanks.
Jeff Storey — Chief Executive Officer
Yeah, I’ll take the second half of the question first. We see great demand for our fiber-based services. As part of the reason that led us to invest in the ultra-low led — low-loss overbuild is demand from hyperscalers and others who need really, really high capacities over the fiber and where traditional fibers just couldn’t do it as efficiently as the new low-loss fiber. And so, we continue to work with them and to partner with them in network builds, but also providing them solutions. And we think that’s a great part of our business. From a conduit perspective, we sell conduit from time-to-time or lease conduit from time-to-time, but it’s not a big part of the overall business.
Neel Dev — Executive Vice President and Chief Financial Officer
And on the — on your question, Tim, on the booking trends, fourth quarter overall was the best sales quarter for us this year, largely driven by IGAM and Enterprise, but I also do want to caution, usually fourth quarter tends to be a light quarter for sales, but this quarter was a very good quarter of sales, but driven by more complex larger deals, which take a while to install. So we’re not going to see the benefit in first quarter, but more so coming in, in second, third and fourth quarter of this year.
Tim Horan — Oppenheimer & Company — Analyst
And are you seeing a competitive intensity in Enterprise increase or decrease or any change in competitive intensity?
Jeff Storey — Chief Executive Officer
No. We’ve got great competitors out there that work really hard to provide for the customers. We think we have a better solution, and we think we execute better. We think our local model for Enterprise customers is really, really a key differentiator for us. We think our high-touch model for our GAM customers in our global footprint is really a differentiator for us. But ultimately, we’ve got strong competitors, and the competitive intensity is high every day. It’s up to us to execute. And I haven’t seen anybody that if we execute well, it beats us. So it’s really us that matters. Our performance is what determines success or not.
Tim Horan — Oppenheimer & Company — Analyst
Thank you.
Jeff Storey — Chief Executive Officer
Sure.
Operator
Our next question from the line of Batya Levi with UBS. Please go ahead.
Batya Levi — UBS — Analyst
Great. Thank you. Couple of questions. First, you talked about potential impact of rerating customers in the first quarter. Is that on the Wholesale side, or is there some component on the Enterprise? Is there way of quantifying potentially that impact? And second, can you talk about what your guidance assumes in terms of incremental synergy achievement this year? And then maybe, finally, cash taxes have remained really low. When do you expect that to ramp?
Jeff Storey — Chief Executive Officer
Neel?
Neel Dev — Executive Vice President and Chief Financial Officer
I was just making sure I get all parts of that. So, Batya, on the rerate, that was just a general statement in terms of seasonality. We see that every year. Fourth quarter tends to be strong and then, first quarter, we do have some pressures from rerates from our larger customers. So primarily, it’s not just Wholesale, but also IGAM and the top end of Enterprise. So there is some seasonal weakness in the first quarter.
In terms of your question on savings, I think linear is still a good assumption. We achieved $430 million. And we’re still good with the $800 million to $1 billion over three years. We’re going to be very milestone-based. We have good line of sight. And that’s all factored into our EBITDA guidance range. In terms of cash taxes, we do have offsets there, and it’s been running lower than $100 million. And as we look at our NOLs, we’re good for the next few years.
Batya Levi — UBS — Analyst
Okay. Thank you.
Operator
Our next question from the line of Philip Cusick with JPMorgan. Please proceed.
Philip Cusick — JPMorgan — Analyst
Hey, guys. Thanks. Jeff, that was helpful on the consumer side. Can we assume that your strategic view sort of over and can you expand on the potential to, as you said, sell or partner for parts of the business. It sounds like you engaged, but is the focus now more internal or do those discussions continue? Thanks.
Jeff Storey — Chief Executive Officer
No. Thank you, Phil. The discussions are continuing, but the strategic review is over. And the strategic review says, here’s how we should be investing in the business and here is how — where we should be harvesting and all of those types of things. And regardless of whatever scenario, whether we maintain at all as a part of CenturyLink, we sell part of it, are we partner with somebody, those things that we’re doing now drive the best long-term shareholder value regardless of whatever scenario works out. And so, those are the things that we are focused on. So I would say that the strategic review is over, but we are continuing and actively engaged with partners and parties that might be interested in the transaction, and we’ll continue to stay engaged with them and figure out if there is some other way to create additional shareholder value.
Philip Cusick — JPMorgan — Analyst
Okay. And can you help us quantify the current count of home fiber broadband available? And how big you think that could be in your footprint and anything you can do to reduce the cost of deploying that to homes over time?
Jeff Storey — Chief Executive Officer
Yeah. So I think we have about 2 million fiber homes activated today, fiber addressable homes today. We continue to expand that. We will continue to expand it in the coming years. I don’t want — I don’t have a specific number for how big that can be, but we’re not nearing the cap of it. We’ve got a lot of room to continue to grow. And even within that 2 million homes, we got a lot of room to grow our penetration rate. We think we can do a much better job of driving the penetration rate within that 2 million homes. We think we can expand the addressable market by building out to more homes pretty aggressively over the coming years. And we don’t see any near-term cap in our ability to expand our addressable footprint. So Neel, do you want to add?
Neel Dev — Executive Vice President and Chief Financial Officer
Yeah. So I think — just the only thing I’ll highlight is, Phil, a big part of in, call it, 20%, 25% of that footprint we added over the last 18 months to a couple of years or so. And so, part of the reason the penetration there is still ramping and we like the penetration ramp is because some of that is relatively new deployment. And so, we still see a lot of opportunity in terms of adding homes with our micro-targeting strategy where the cost is low and they look good from a return perspective.
Jeff Storey — Chief Executive Officer
And if you think about, I mean, doubling our 100 meg subscribers and — over the course of the last year and almost tripling our 1 Gig subscribers, our Consumer team is doing a good job at figuring out how to — where do we build fiber and how do we communicate with our customers in a way to give them the products and services that they want. And so, there — we were only going to get better at that. And they’ve got a lot of initiatives to drive the penetration rates up.
Philip Cusick — JPMorgan — Analyst
And if I can — sorry, I know I’m taking a lot here, but I’m getting some questions coming in. Can you just help us with the types of conversations you’re having? I mean, are there books out on your Consumer business all or part of it, or is this sort of gradual conversations that may or may not develop over time that we shouldn’t think sort of a urgency behind them?
Jeff Storey — Chief Executive Officer
We’ve been very transparent with a number of parties. We’ve worked closely with them. We, of course, have NDAs and other things in place. So I’m not going to name names, but we have worked very closely to give people true insight to our Consumer business, so that they can evaluate. If there are opportunities for us to partner together or to do a transaction. The character of those transactions are all across the board and the types of companies that we’ve talked to are a little bit across the board too. So whether it’s a — look at a particular state or look at all of the Consumer business or some sort of joint venture, I mean we’re open to all of those various things.
Philip Cusick — JPMorgan — Analyst
Thanks very much.
Operator
Our next question from the line of David Barden with Bank of America. Please proceed.
David Barden — BofA Merrill Lynch — Analyst
Hey guys. Thanks for taking the questions. I guess, the first one, Neel, just as we kind of look at the cash flow guidance range, it seems like there is some nice tailwinds from interest savings, tailwinds from maybe a pension contribution savings. So I guess, I wonder is the high and the low end, is the difference there in the capex spending given that the midpoint of the guidance is kind of pretty much consistent EBITDA with what we did in ’19. I guess, kind of where we — what would land us in the higher or lower end of those ranges and the moving parts there would be helpful?
And then just the second piece on the consumer broadband side, the — could you kind of talk a little about the ARPU, difference between the lower speed that you’re losing and the higher speeds that you’re gaining and how the cadence of price hikes will kind of further in over the course of 2020? Thanks.
Neel Dev — Executive Vice President and Chief Financial Officer
So David, I think on your guidance range for cash flow, I’ll try to see if I can simplify that. I think it’s capital and working capital. So if you start with EBITDA less capex, net cash interest on our guidance for cash taxes and kind of do the math on implied working capital, it’s roughly $200 million and — which is largely our OPEB cash spend, which is in addition to what kind of flows through EBITDA. So that’s the $200 million use of working capital. And if you think about our trade working capital, DSOs and DPOs, just a day difference there, good swing working capital by $100 million or so. And then, there is capital in general. So it’s not perfect, but that’s kind of the rough math in terms of the working — the overall free cash flow range.
David Barden — BofA Merrill Lynch — Analyst
Got it.
Jeff Storey — Chief Executive Officer
And on ARPU?
Neel Dev — Executive Vice President and Chief Financial Officer
And in terms of ARPU, I think in general, as we are moving customers up from a bandwidth standpoint, especially into Gig services, the ARPU is significantly higher. And so, that is something that we are continuing to work on. And the churn rates are better. So that’s going to be an ongoing effort for us.
David Barden — BofA Merrill Lynch — Analyst
Okay. Great. Thanks guys.
Operator
Our next question is from the line of Nick Del Deo with the MoffettNathanson. Please go ahead.
Nick Del Deo — MoffettNathanson LLC — Analyst
Hi, thanks for taking my questions. To what degree is your higher expected capex in the coming year helping to lower your opex? And on the flip side, do any of the initiatives you’re undertaking like Edge come with a measurable opex drag?
Jeff Storey — Chief Executive Officer
Yeah. So first of all, I appreciate the fact that — I mean, the question is, it hits right to the point. We do invest capital to reduce opex. That is a significant part of our strategy. We invest capital to ultimately drive free cash flow per share, but on an intermediate basis, improve EBITDA. And so, whether that comes from revenue or comes from operational efficiencies, we think that’s a really good use of our capital. I don’t have an exact percentage, but the — there is a fair amount that we used to drive the operational efficiencies, the digitalization of our business, the tools and the processes that we’ll use with our customers to drive out costs and drive up the customer experience.
Neel Dev — Executive Vice President and Chief Financial Officer
Yeah. Typically, Nick, I think like Jeff has mentioned several times, I think when we invest, it’s a combination of improving margin and also driving revenues. So I’ll just give you a simple example like when you’re adding buildings to the network, there is off-net to on-net savings that we’re saving in terms of network expense and then, there is other savings in terms of operation side and how we can troubleshoot, etc. So there is a long list of things that drives efficiencies from our capital investment, similarly on the back-office systems and processes as well.
Nick Del Deo — MoffettNathanson LLC — Analyst
But — and on the flip side, do any of your initiatives come with a measurable upfront opex drag?
Jeff Storey — Chief Executive Officer
Yeah. I mean they do — there is nothing that is a massive opex drag, but there is. If you’re going to launch a business like edge computing, you’re going to have opex that pre-runs revenue. And so, yeah, there is some. It’s not material to our business. I don’t see it as a major overhang on us or something that we have to work really hard to overcome, that you’re certainly right that there is some operational cost that sometimes advance revenues.
Nick Del Deo — MoffettNathanson LLC — Analyst
Okay. And then, Jeff, you’ve described division for the SMB platform as being high volume and frictionless, I think the words you used. How far away are you from having that platform sort of in place and generating new business?
Jeff Storey — Chief Executive Officer
Yeah, we’re getting closer every day, which is maybe not a very fulfilling answer, but it’s a complicated thing. So let me tell you some of the stuff that we’re doing that indicates that we’re getting there, and we’re adding new buildings continually and those new buildings give us an addressable market with those customers that make it possible for us to sell to them in the first place; off-net, not being a very good solution for that type of business; on-net, really driving it. So we’re doing that. We’re also deploying equipment in those buildings that make it easy for our operations team to turn up services on a very quick basis because that’s what we think we need in that — for those types of customers.
Then, we’re also introducing products like UCaaS, and we are very actively rolling out SD-WAN. We’re active with various different platforms. We’re actively rolling out UCaaS and making sure that we have the products and services. All of those things go into the digital environment that we’re looking for.
We’re also updating our back-office support so to speak. I want to be more front-office than back-office. Some of those take a little bit longer, but we have a number of initiatives that we think are going to help us drive the growth out of that business and really create an environment and a product set that meet the needs of those customers.
Nick Del Deo — MoffettNathanson LLC — Analyst
Got it. Thanks guys.
Jeff Storey — Chief Executive Officer
Sure.
Operator
Our next question from the line of Brett Feldman with Goldman Sachs. Please proceed.
Brett Feldman — Goldman Sachs — Analyst
Thanks. So you’ve had a couple of quarters here. You talked about this earlier, a very strong bookings in Enterprise segment. It sounds like 4Q was so strong. We probably should not be run rating that into the early part of this year. When we spoke — speak to investors about your business, they think if you are selling into a very hard end-market with some secular pressures in it. So I was hoping you could maybe just give us a little more context around why the bookings have improved, how much of that is stuff you think you’re doing right, maybe how much of it is misunderstanding of the growth opportunities available to your Enterprise business in this market and maybe just some general context around the extent to which you think some of this is durable, even if we’re not necessarily extrapolating the 4Q performance? Thank you.
Jeff Storey — Chief Executive Officer
Yeah. So let me talk about why I think we win, and I’ve got a list of things that go into it. It’s not one thing that causes us to win, but it starts with — we have, what I believe is the world’s best fiber network. We are increasing our connectivity in the on-net locations every single day. We are connected with every cloud provider across the US, but really across the world. And we have great connectivity into them.
We’re creating solutions that allow our customers to manage their infrastructure more efficiently, things like Dynamic Connections where they can scale bandwidth up and down, redirect it from one provider to another, from one cloud provider to another cloud provider, if they want, things like cloud application management where they can look a layer higher and look at their cloud applications and how are they running. And so, I think it starts with the connectivity, the fiber-based, the high speed, the low latency connectivity coupled with embedded security to make it a reliable and safe environment for them, coupled with our network-related services to make it easier for our customers to manage, coupled with a great team.
And I talked about our federal team and how great I think they are, but we also have great Enterprise and GAM teams and Small and Medium business teams. We have a great team going out and driving the success. So I think that our success over time in the short term and in the long term, comes down to our ability to leverage our network with great products and make sure that we’re positioning them in front of our customers properly through great sales, and we’re executing on delivering them through a great operations group. And so, I think it comes down to — we win if we execute with the network and the services we have.
Brett Feldman — Goldman Sachs — Analyst
All right. I think — just a follow-up, so do you think that the end-market opportunity would allow you if you keep executing this way to continue to grow your bookings? I think that’s a debate a lot of investors have, is it a growing pie, is it a shrinking pie or are you just taking a bigger part of it?
Jeff Storey — Chief Executive Officer
I understand the reason for the confusion because it is a growing pie in some parts and a shrinking pie in other parts. And sometimes, we get so focused on the shrinking pie. We’re not paying attention to the growing pie, and that’s what I think we also do differently. One of the reasons I think that we’re in a better position is we are one thing. We are a fiber provider. We are mostly Enterprise-focused, but we are a fiber provider. And so, we look at how do we leverage all of those capabilities. So for us, I think that yes, we have parts of our business that are declining, but we face the truth on those. We recognize them for what they are. We manage them for contribution, while we have them, and we lean into the growth of the things that we think will grow like edge compute, like the other cloud capabilities that I’ve talked about, like pure bandwidth and transmission rates that are going to continue to go up. And so, I think — I get the reason the confusion. It’s a complicated business. But overall, I see better opportunities than downside.
Brett Feldman — Goldman Sachs — Analyst
Thank you.
Neel Dev — Executive Vice President and Chief Financial Officer
Brett, I think — one of the things to add to that, I think it’s — Jeff kind of mentioned it several times, I think if you think about everything we see in terms of emerging trends, it’s all about more bandwidth and less latency, and that makes fiber more and more valuable. And I think what clouds the picture like Jeff said, are the legacy services. So all the fiber-based services are growing. And the other thing that we do is we have a lot of focus. So compared to a lot of our larger competitors that have — are not as focused on the Enterprise business like we are, and we are investing in our customers, and we’re building out to a lot of their locations and enabling the transitions.
Jeff Storey — Chief Executive Officer
And if you — when an investor asks you that, ask them about their business and do they need more bandwidth or less bandwidth over time, do they need more locations or fewer locations over time, do they need more control of their applications or less control of their applications, they need more security or less security. If you think about the fundamental trends that drive our customers, they are good for us, and we see opportunities across all of those.
Brett Feldman — Goldman Sachs — Analyst
Appreciate the color. Thank you.
Jeff Storey — Chief Executive Officer
Sure. Thank you, Brett. And France, I think we have time for one last question.
Operator
Very well. Our last question is from the line of Michael McCormack with Guggenheim. Please proceed.
Michael McCormack — Guggenheim Securities — Analyst
Hi, guys. Thanks. Maybe, just a quick comment on the capex guidance, what’s driving the variance there? What would cause you to be at one end or the other of it? And then secondly, I guess, on the Consumer business, will there be any incentives to roll fiber faster to some of those areas where you’re seeing the most loss on the high-speed data set? Thanks.
Neel Dev — Executive Vice President and Chief Financial Officer
So generally, our approach is very success-based. And so, that’s one of the reasons for the range. So we want to make sure that if we’re deploying fiber, we’re deploying capacity, we’re keeping up with the penetration and selling into those buildings before we deploy more. So that’s one of the drivers, just keeping the capital more aligned with revenue performance and then the two overall driver is really investing in more fiber, both in Enterprise and Consumer.
Jeff Storey — Chief Executive Officer
And then on the — are there things that drive us into one area more than another? Yes, there are. It’s complicated formula, so to speak, but it includes things like how much does it cost us to build, what’s the permitting time frame, what are the customer penetrations, what types of customers do we see in there? So there are a lot of factors that go into it, and we’ve got a very smart operations research team within our Consumer business that is working on that every day to make sure that, that not only are we capturing and targeting all of the homes that we should be targeting, but we’re doing it in the right priority.
Michael McCormack — Guggenheim Securities — Analyst
Great. Thanks very much.
Jeff Storey — Chief Executive Officer
With that — thank you very much, Mike. Appreciate the question. Before we end today’s call, I’d like to summarize a few key thoughts based on our progress in 2019 and the outlook for 2020. We are executing well on the capital allocation plan we announced last year. We are investing more in the business to drive growth, and positioning our fiber network is the platform for delivering the solutions our customers need. We made excellent progress on our objective to reduce leverage, extend maturities and lower interest expense. And as you saw, our interest expense for 2020 is more than $300 million lower than we paid in 2018. And we still returned over $1 billion in the form of a dividend to our shareholders in 2019.
For our IGAM and Enterprise business units, we met our objective for growth in the second half of 2019, compared to the first half of 2019, and we’re optimistic about 2020. We had a solid start in our first year with our transformation initiatives, which not only improve the customer experience and increase efficiency throughout the organization, they reduce our cost to operate the business. We delivered $430 million in annualized run rate savings as of the end of 2019. We operate what we believe to be the world’s best fiber network, and we will continue to focus our capital deployment on expanding our fiber footprint and providing innovative solutions over that network to all of our customers. All of these initiatives and accomplishments are aligned with our overall guiding principle to grow free cash flow per share. Thank you for joining today’s call and your interest in CenturyLink. France, that concludes the call.
Operator
[Operator Closing Remarks]