Tony Davis - VP, IR Glen Post - President & CEO Stewart Ewing - CFO Karen Puckett - President, Global Markets

David Barden - Bank of America Batya Levi - UBS Phil Cusick - JPMorgan Frank Louthan - Raymond James Mike McCormack - Jefferies Brett Feldman - Goldman Sachs Spencer Gantsoudes - Morgan Stanley

Good day, ladies and gentlemen, and welcome to CenturyLink's Fourth Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Tony Davis, Vice President of Investor Relations. Mr. Davis, you may begin.

Thank you, Saeed. Good afternoon, everyone, and welcome to our call today to discuss CenturyLink's fourth quarter 2014 results released earlier this afternoon. The slide presentation we will be reviewing during the prepared remarks portion of today's call is available in the Investor Relations section of our corporate website at ir.centurylink.com. At the conclusion of our prepared remarks today, we will open the call for Q&A. If you turn to Slide 2, you'll find our Safe Harbor language. We will be making certain forward-looking statements today, particularly as they pertain to guidance for full year and first quarter 2015 and other outlooks in our business. We ask that you review our disclosure found on this slide as well as in our press release and in our SEC filings, which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements. We ask that you also note that our earnings release issued earlier this afternoon and the slide presentation and remarks made during this call contains certain non-GAAP financial measures. Reconciliation between the non-GAAP financial measures and the GAAP financial measures are available in our earnings release and on our website at ir.centurylink.com. Now turning to Slide 3, your host for today's call is Glen Post, Chief Executive Officer and President of CenturyLink. Joining Glen will be Stewart Ewing, CenturyLink's Chief Financial Officer; and also available during the question-and-answer period of today's call will be Karen Puckett, CenturyLink's President of Global Markets. Our call today will be available for telephone replay through February 19, 2015 and a webcast replay of our call would be available through March 5, 2015. Anyone listening to a taped or web cast replay or reading a written transcript of this call should note that all information presented is current only as of February 11, 2015 and should be considered valid only as of this date, regardless of the date heard or viewed. So as we move to Slide 4, I'll now turn the call over to Glen Post. Glen?

Thank you, Tony, and good afternoon, everyone, and thank you for joining us today. Starting on Slide 5, our fourth quarter results were slightly weaker than our expectations but we are pleased with our full year 2014 performance and the progress we made toward reaching revenue stability. The weakness in the fourth quarter was primarily due to lower hosting revenue growth resulting from lower installs and non-recurring revenue along with higher churn and credits. Also, we experienced accelerated decline in low bandwidth data revenue and we had a one-time true-up in employee healthcare cost that impacted the quarter. We are taking a number of actions to drive a stronger strategic revenue growth in 2015 and we’ll discuss some of those with you today. Our recent organizational realignment is expect to result in some initial negative impact on our sales momentum in the first half of 2015, but we are confident this refined operating structure positions us well to drive stronger revenue results, strategic revenue growth and operating efficiency over the long-term. Global sales and revenue is now led by Karen Puckett, and we expect to accelerate our future revenue growth through a more unified sales and marketing approach and improved customer experience. Additionally, the alignment of our shared global network and data center infrastructure operations under a single senior leader Maxine Moreau is expected to drive increased efficiency and consistency. We also completed two strategic acquisitions in December. We acquired a DataGardens in Cognilytics, which we believe significantly enhance our project and solutions portfolio. The DataGardens acquisition give us a leading disaster recovery as a service cloud solution, which once fully integrated with our current IT solution should provide an improved end-to-end customer experience. Acquisition of Cognilytics positions CenturyLink as a leading provider of advanced predictive analytics and big data solutions to help mid-size and large enterprises convert data to decisions. We accomplish this through deep expertise and big data deployment, advance decision sciences and predictive analytics. CenturyLink can now deliver advanced big data analytic solutions across multiple industries including financial services, retail, consumer products, healthcare, oil and gas among others. Also, we have an outstanding portfolio of network hosting, cloud IT and managed service capabilities. We’ve integrated this broad portfolio into solutions for a diverse set of customers from the largest companies from the world to small locally focused companies. In addition, we’ve expanded our distribution capabilities and made additional investments in our product enhancements we believe will be effective in helping drive growth in the coming year. Now turning to Slide 6, I'd like to recap our performance for 2014. During the year, we continued to effectively execute against our objectives and make investments we believe will lead to revenue stability. For the full year 2014, we generated total operating revenue of $18.03 billion, a 0.4% decline compared to 2013; it’s an improvement from the 1.5% year-over-year decline in 2013 compared to 2012. In 2014, the core revenue, strategic and legacy revenue trend also continue to improve from 1.3% annual decline in 2013 to a 0.6% annual decline in 2014. This continued revenue improvement was driven by a nearly $380 million increase in strategic revenues, primarily due to growth in high bandwidth data services high-speed Internet, Prism TV and hosting and cloud revenues. Revenue growth from high bandwidth data services MPLS, Ethernet and Wavelength was a strong 16% year-over-year. Additionally, a decline of legacy revenue slowed from 7.4% in 2013 to 6.3% in 2014. We achieved solid growth in both high-speed Internet and Prism TV subscribers throughout the year adding 91,000 and 67,000 respectively. We've been pleased with t continued growth of Prism TV subscribers in existing markets where we further expanded Prism TV service in 2014. Throughout the year we invested to enhance our network to improve speed, availability across our footprint. One direct result of this investment is that we grew the number of enabled access lines receiving 20 megabits and 40 megabits each by more than 45% over the prior year. Additionally, we generated solid free cash flow of $2.7 billion and returned approximately $1.9 billion to shareholders through our dividend and share repurchase program. Now turning to Slide 7, during 2014, we continued to transform our company from a provider of traditional network communications to an integrated provider of network, cloud hosting and IT services, and we're focused on executing on several strategic priorities. We believe these priorities are key to successfully navigating the continued fast promotion of our company and driving long-term profitable growth. The first of these is to grow business solutions. We continue to drive strong strategic growth, revenue growth from meeting businesses and government demand for our MPLS, Ethernet and Wavelength network services during the year. Additionally, our Managed Office and Managed Enterprise Solutions continued to gain traction and are beginning to drive meaningful revenue growth due to increasing customer interest from both small and large business customers. These Managed Services help free them from day-to-day management of their network services and equipment as well as maintenance. We are seeing strong demand for GPON service from businesses and expect to drive additional revenue growth from our continued expansion of GPON availability in the months ahead. Wholesale revenues remained under pressure due to lower bandwidth data service disconnects along with reductions in intercarrier compensation and declining voice usage. We've had success mitigating our losses by expanding our fiber based wireless backhaul services; we now serve over 21,000 towers. The key focus in 2015 will be helping our wholesale customers with their colocation and cloud requirements. Growth in our hosting services including collocation, managed hosting, cloud solutions was below our expectations. However, we believe the hosting opportunities remain strong as we improve the capability of our highly automated next generation CenturyLink cloud platform. Price compression on colocation renewals and technology refreshes along with some increased churn driven by small group of large customers continue to pressure overall hosting revenue growth. In addition, with our focus on leaving IT capacity issue due to production workloads, we've seen a measured adoption of multi-tenant cloud based services, based on how ready the customer's application architecture is for cloud conversion. However, interest in and demand for cloud based services continues to grow. Also, our sale of colocation services reached record levels in the second half of 2014. From the standpoint of cloud, we are focusing on opportunities that leverage our key strengths in cloud, one example of which is the ability of IT departments to set spending thresholds at the individual or department level and monitor cloud spend on a real time basis. Although our Managed Hosting sales are not where we want them to be, we are seeing success in selling our cloud and Managed Hosting Solutions. And during the fourth quarter we added eight Fortune 500 companies as CenturyLink cloud and managed hosting customers. And finally, on direct channel, partners are beginning to sell our managed hosting solutions; we expect to additional partners in 2015. Going on to Slide 8, in the consumer segment, we continue to see good results in those markets we've deployed higher bandwidth and IPTV services. For example, in Omaha, the results continue to be strong in the consumer market and we are seeing good results in the small, medium business space as well. Along with our gigabit service expansion of our businesses we also announced the availability of gigabit service to residential customers in select locations at 10 cities including sine of our larger markets like Minneapolis, St. Paul, Denver, Seattle, Las Vegas and Portland. We expanded the gigabit footprint in these markets in 2014; expect to further expand availability of this service in the months ahead. We also plan to continue to invest in our Prism TV capabilities having added approximately 385,000 addressable homes during 2014 which exceeded our full year 2014 target of 300,000 household. As of year-end, we had more than 240,000 Prism TV customers across addressable homes of 2.4 million. We anticipate expanding Prism TV service to additional households and markets during the second half of 2015; we're not ready to announce specific markets at this time. Finally, we are focused on driving improved operating efficiencies through a numbers of methods including network simplification and rationalization that should improve our end to end provisioning time and help to drive standardization. We continue to modernize our network by replacing ATM with IP technology that enables high broadband speeds while also adding network capacity to serve our growing customer base. For full year 2014, we added over 4 terabytes to our IP backbone bringing total capacity now at 20 terabytes per second on that backbone. Also, we continue to manage expenses related to out declining legacy revenues and, lastly, we have laid the foundation to migrate our internal IT operations to our cloud platform as we continue to invest in IT virtualization. In recent years, we have consolidated over our internal IP operations from more than 10 data centers to 4 data centers and we are using a cloud first approach to rapidly deploy the same innovative platform infrastructure and software-as-as-service solution across our internal IT operations that we're selling through our cloud and IP hosting customers. This effort is expected to reduce our IT cost and improve security and other efficiencies for CenturyLink. In summary, I believe we are well-positioned in markets with a strong portfolio of strategic assets. We've also invested in expanding our unified distribution capabilities and we have at laser focus on continuing to improve our revenue trend in the months ahead. Now I'll turn the call over to Stewart for an in-depth look at our financial results and full year and first quarter 2015 guidance. Stewart?

Thank you, Glen. I'll spend the next few minutes reviewing the financial highlights from the fourth quarter and then conclude my remarks with an overview of the full year and first quarter 2015 guidance we included in our earnings release issued earlier this afternoon. Beginning on Slide 10, I'd like to review some highlights from our fourth quarter results. I'll be reviewing the results excluding special items as outlined in the earnings release and associated financial schedules. Operating revenues were $4.44 billion on a consolidated basis, a 2.3% decline from the fourth quarter of 2013 operating revenues. Core revenue, which is defined as strategic revenue plus legacy revenue, was $4.05 billion for the fourth quarter, a decline of 1.5% from the year ago period. Our strategic revenues grew 2.2% year-over-year and now represent 52% of our total revenues compared to 50% a year ago. Strength in strategic products such as high-speed Internet, high-bandwidth data and Prism TV continue to drive this growth. We added approximately 12,900 Prism TV customers and 18,600 high-speed Internet customers during the fourth quarter. We generated strong operating cash flow of approximately $1.71 billion for the fourth quarter and achieved an operating cash flow margin of 38.5%. The year-over-year decrease in operating cash flow and operating cash flow margin was primarily driven by the continued decline in legacy and product line revenue and an accounting adjustment of about $40 million related to employee healthcare cost offset by one-time reductions in facility cost and operating taxes totaling $30 million recorded. Additionally, we generated $373 million of free cash flow during the quarter, which is defined as operating cash flow less cash paid for taxes, interest and capital expenditures along with other income. Our solid cash flows continue to provide us the financial strength and flexibility to meet our business objectives and drive long-term shareholder value. Our adjusted diluted earnings per share for fourth quarter was $0.60. As we've discussed on prior earnings calls, adjusted diluted EPS excludes special items and certain non-cash purchase accounting adjustments as outlined in our press release and associated supplemental financial schedule. These special items included two larger items worth calling out in the fourth quarter, a $60 million favorable income tax adjustment and an approximate $60 million pension settlement charge as a result in a partial termination of a plan. Additionally, under the $1 billion share repurchase program we repurchased 2.3 million shares for an investment of $91 million during fourth quarter. We expect to continue to be optimistic in completing this program within the 24-month period. Now turning to Slide 11, fourth quarter 2014 operating revenues declined $104 million or 2.3% compared to fourth quarter a year ago as the growth in strategic revenues was more than offset by the decline in legacy revenues due to access line losses and lower minutes of use and lower data integration revenues. The growth in our strategic revenues was primarily driven by strength in high-speed Internet, high bandwidth business data services and Prism TV. Although legacy revenues continue to decline, the revenue decline in fourth quarter 2014 was 16% lower than the fourth quarter revenue decline a year ago. Moving to Slide 12, as outlined in our earnings release, beginning with the fourth quarter reporting, we've changed our segment reporting to align with our new organization structure. We will now report two segments: Business and Consumer. The Business segment consists primarily of providing network, IT services, colocation, managed hosting and cloud services to enterprise, wholesale and governmental customers across the U.S. and select international locations. The consumer segment consists primarily of providing products and services to residential consumers across our 37-state footprint and remains relatively unchanged from prior reporting. Schedules providing eight quarter trended detail of these new segments are provided in the earnings supplement which is available on our investor relations website. Now turning to our Business segment. In fourth quarter, the business segment generated $2.7 billion in operating revenues which decreased $102 million or 3.6% from the same period a year ago. Fourth quarter strategic revenues for the segment increased 0.4% to $1.6 billion from fourth quarter year ago driven primarily by strength in high bandwidth services such as MPLS, Ethernet and Wavelength which was largely offset by the continued decline of low bandwidth data services and a one-time true-up related to strategic revenues of approximately $10 million in the quarter. We continue to generate solid growth across the enterprise customer growth market and we see an opportunity for further investment in the small and medium size business space to provide improved market share and drive further growth. Legacy revenues for the segment declined 6.4% from fourth quarter 2013 due primarily to continued decline in access lines. Total business segment expenses increased slightly from the year ago period driven primarily by higher sales related expenses. Our segment margin was 43.6%, a decline from 46% a year ago. This decrease was primarily due to the higher cost I just mentioned above along with the continued decline in business segment legacy and low bandwidth data services revenue. On Slide 13, I’ll provide a little more detail on the revenue mix within the business segment. High bandwidth data services revenue grew 13% year-over-year compared to fourth quarter of 2013 driven by continued strength in sales to enterprise and governmental customers. Low bandwidth data services including private line continued to decline in fourth quarter. The year-over-year revenue decline of 13% was primarily due to continued disconnects of TDM circuits by enterprise and wireless customers as they migrate to fiber-based services. In the fourth quarter, data integration revenues decreased approximately $40 million or 23% compared to fourth quarter 2013 driven by lower CPE sales. If you remember fourth quarter in 2013, we actually had one sale to a large customer that makes up most of that difference. Now turning to Slide 14, Consumer generated $1.49 billion in total operating revenues which was basically flat from fourth quarter 2013. Strategic revenues in this segment grew 6.4% year-over-year to $727 million driven by growth in high-speed Internet and Prism TV customers price increases, improved churn and certain favorable revenue settlements in the current quarter. Legacy revenues for the segment declined 5.7% for fourth quarter 2013 as access line and long distant revenue declines were partially offset by select price increases. The comparable year-over-year decline in fourth quarter 2013 was 8.5%. Operating expenses increased slightly compared to the same period a year ago primarily driven by higher Prism TV content cost. Now turning to Slide 15 and our full year and first quarter 2015 guidance, for full year 2015, we anticipate total operating revenues of $17.9 billion to $18.1 billion and core revenues of $16.25 billion to $16.45 billion, both stable when compared to full year 2014 due to expected continued increases in the level of strategic revenue growth offsetting the anticipated legacy revenue declines. Operating cash flow is expected to range from $6.8 billion to $7 billion and free cash flow is expected to range from $2.5 billion to $2.7 billion. Operating cash flow and free cash flow are expected to decline for full year 2014 primarily driven by the continued decline in higher margin legacy revenues, the impact of higher expenses associated with the increased growth in strategic revenues and an increase in pension expense of approximately $90 million due to changes in actuarial assumptions which really relate to our adoption of new mortality tables. We anticipate a decline in depreciation and amortization expense of approximately $250 million for full year 2015 compared to full year 2014 primarily driven by the impact of declining amortization of acquisition related intangible assets and the annual review and update of deprecation rates which were expected to more than offset increases in depreciation expense associated with continued capital investment. Included into the full year free cash flow estimate are cash taxes of $25 million to $50 million. As a result of bonus deprecation being approved our cash taxes will now be less than we anticipated earlier. We also expect to incur capital expenditures of approximately $3 billion in 2015 and adjusted diluted EPS is expected to range from $2.50 to $2.70. Currently, we have not yet decided whether to accept or reject the specific build-out opportunities related to support payments available under CAP II. We plan to provide an update later this year when it is determined the extent to which the implementation of CAP II will impact our future revenues and cash flows. For first quarter 2015, we expect operating revenues of $4.45 billion to $4.5 billion, an increase compared to fourth quarter 2014, primarily due to projected growth in strategic revenue offsetting the anticipated decline in legacy revenue resulting in higher core revenue and also higher data integration revenues in first quarter 2015. Core revenues are expected to range from $4.04 billion to $4.09 billion. Operating cash flow is projected to be between $1.64 billion to $1.69 billion, a decrease compared to fourth quarter 2014 primarily due to higher pension cost, payroll taxes and operating taxes along with the continued decline in higher margin legacy revenue. We also anticipate an approximate $90 million decline in depreciation and amortization expense in the first quarter of 2015 compared to fourth quarter of 2014 driven by the reasons previously described. The anticipated lower level of depreciation and amortization expense is expected mostly offset the decrease in operating cash flow and the impact of favorable income tax adjustments in fourth quarter 2014 resulting in adjusted diluted EPS expected to range from $0.56 to $0.61 per share in first quarter 2015 compared to the $0.60 in fourth quarter 2014. That concludes our prepared remarks for today. So at this time, I’ll ask the operator to provide instructions for the Q&A portion of the call.

[Operator Instructions]. Our first question comes from David Barden from Bank of America. Your line is open. Please go ahead.

Hey, guys, thanks for taking the questions. I guess my first question is, Stewart, if you could kind of go back and kind of catalog in one list some of these one-timers from the fourth quarter, I think you normalized some out in your EBITDA number but you didn’t normalize some other ones out which I guess were a $40 million one-time expense offset by $30 million in one-time benefits; there was I think you said there were some positive revenue settlements in the consumer segment in the quarter. If you could kind of walk us through that so we could kind of get sense is to what kind of earnings power the company was in the fourth quarter. And then the second part on the guidance I guess, Glen, you kind of foreshadow that the shape of 2015 would be a little stronger in revenue in the second half than the first half as a result of some of the reorganization issues, but looking at the first quarter revenue guidance its up sequentially, it's actually flat year-over-year to midpoint. So I was wondering could you kind of give us a sense to how much of the expectation for revenue stability, do you kind of have in hand right now that you see in your books and your funnels, and then what increment is coming from the hopped four benefits that will be in the back-end of this reorg? Thanks.

Yes, so David, in terms of the fourth quarter items that were more or less one-time items, we did have a $40 million true-up related to group insurance that was an increase in expense that was basically offset by $30 million of favorable adjustments that we had; we had about a $15 million favorable adjustment for related to operating taxes which were primarily property taxes, and then $15 million related to facilities cost. That was a favorable adjustment that’s a one-time adjustment. So really net-net about $10 million negative expense in the fourth quarter that would be one-time adjustments. And on the revenue side, basically, there were just a couple of offsetting items there. In business revenue on the strategic side, we had a $10 million negative adjustment that I mentioned. That was related to a large customer that we have that we needed to book the revenue differently than the way -- basically it needed to be accounted for differently based on the contract. So we had a $10 million negative adjustment there on the business segment or strategic revenue. We also had a positive settlement that I mentioned as well of about that $10 million that impacted consumer revenue on the strategic side, and that was basically related to the couple of settlements that we had with parties that we sell products for.

Got it.

Yes, David, regarding the revenue and first half or second half you are right. We do expect more growth in second half of the year. We think we’ll some mild disruption due to this reorganization; we are changing sales plan, we’re changing really sales leadership for certain accounts across the country. So there would be some disruption there. Our funnel is good right now; we have a really good funnel. Also, we’re seeing a lot of demand for combined solutions that we are selling. As I mentioned, we saw some big deals with some Fortune 500 companies, we're selling in small mid-size space we’re seeing a lot of demand for our managed office product. So we’re confident we’re going to see increasing demand in the second half of the year and, yes, we are up in the first quarter but we expect we need more acceleration to hit that revenue stability that we expect into the second half of the year. So that’s what we believe going to happen; we believe we have plans in place to make that happen including the expanded distribution along with the unified approach combining our cloud hosting and network sales teams and leadership.

Yes, and David, the first quarter guidance for revenue is a sequential increase from fourth quarter to first quarter.

Right. And thank you, guys, and if I could ask one quick follow-up, Stewart, again, it sounded like you're baking in the EBITDA guidance, you're baking in $90 million of incremental pension pressure related to assumption. Is it fair to say that if interest rates start to go back up that we kind of get that back over the course of the year?

Yes, so David, that’s baked into the EBIDA assumption, but it’s really a non-cash charge. It's just completely related to an increased or a change in the mortality tables, adopting newer mortality tables that reflect people living longer. Basically, with what’s -- we'd actually merged our three pension plans in the fourth quarter and we are funded at about 84% or so, and we actually had no required pension contributions at all from a cash standpoint for the next three to five years based especially where we look at today. I mean we had a good – a good year; our pension assets are and about 12% or so, 12% to 14% in that range and -- but basically our liability went up a little over about a $1.2 billion basically due to $1 billion of it related to the change in the mortality tables, about a $1.2 billion related to a lower discount rate; we're using a discount rate of 3.9% versus about 4.9% a year ago, and then we had a little over a $1 billion of earnings. So we feel good about where we are with respect to the plans but that $90 million incremental pension pressure is really a non-cash expense.

Got it. Thanks, guys.

Thank you. Our next question comes from Batya Levi from UBS. Your line is open; please go ahead.

Great, thank you. Couple of questions. First, can you a little bit more color on the slowdown in the hosting revenue growth, maybe if you could quantify the churn on what you expect for churn to be in that segment for 2015? And you had mentioned before that cross-selling is a big opportunity. Do we still have that as an upside for that segment? And second question I had sort of lot of M&A activity in the space and maybe if you could remind us your thoughts on further asset purchases as data centers and space that you want to get bigger and what are some of the criteria that you would consider? Thanks.

So Batya, I'll take the first one and let Glen take the second one. Basically, in terms of the churn, the slowdown in hosting, I mean we continue to have bankruptcies hit us from the standpoint of some of the customers in our facilities and some customer credits really related to some new services that we’ve had. So basically, I mean we think we can really get that work through, and from a co-location standpoint, we actually had really good quarter from the standpoint of new sales. And we have a lot of optimism in terms of our ability to be able to sell the colo space and with the developments that we are making to our cloud product that was part of the tier-3 acquisition, we’re confident in our ability to be able to get that product where we can, as Glen mentioned, we picked up five Fortune 100 Fortune 500 companies and so we had a lot of confidence in our ability to able to add to that. It certainly is not up to expectation it's not up to where we wanted to be, but we think with the changes that we’ve made in the selling organization will a more sellers selling those products and service now over time we’ll see improvement in the revenue associated with those businesses.

Batya, regarding the cross-selling, we're bring our sales teams together; so we hope there’s more and more common knowledge. We do a lot of training with those folks. We will have centers of expertise for both network and cloud and hosting, but we think we opportunity to bring to those together and sell a solution of cloud and network is really a strong potential upside force. We were talking with a customer this week who we just talked with; executive talked with it really was interested in enabling the hybrid cloud offering with our cloud hosting and network capability end-to-end type capabilities. So believe that the opportunity is really strong there bringing those together.

Batya, there were two other one-time items I'd like to mention. We had lower non-recurring revenue bookings of about $2 million in the quarter on related to hosting and also we had foreign currency impact that was negative of about $1.2 million. So we had about $3.2 million of more or less one-time items that were negative in the quarter.

And then, Batya, regarding the further asset purchases we might be interested in, we have a similar strong set of assets that believe are aligned with the growth opportunities in our industry. As we've discussed the majority of our strategic products and services are growing well and moving us toward revenue stability. That being said, we are obvious of where all the consolidation is going on in the industry. We think there will be opportunities for additional assets, purchases that could enhance our growth. Our preference, as I've said before, is for inorganic growth or opportunities that really fit well with our strategic priorities that create unique value for our customers, the differentiation, and that's what we've done with the last two acquisitions which also give us some capabilities that others don't have and opportunities that can enhance our revenue and cash flow trajectory. We like to see that growth accelerate and not try to avoid situation will really pull our growth down and that should be a major view. We will consider opportunities that would expand our network capabilities, would increase our metro fiber access footprint. Those are types of assets we'd be interested in looking at overtime and/or investments would enhance our data hosting and cloud and IT service capabilities. So we will -- with each of those opportunities of course we will continue our pretty disciplined approach to these acquisitions.

Thank you. And our next question comes from Phil Cusick from JPMorgan.

I guess, first, if you can talk about your broadband speed upgrade plan. The SEC has raised the broadband definition to 25 meg how does that affect your thoughts and any thoughts on cash?

First of all, I'll let Karen address that, Phil. I'd like to say that the new definition of broadband doesn't really impact us in a significant way. We're going to find our customers with much broadband as we think we can afford in what and the needs that they have. Again we're selling solutions not just speed so we'll continue to do that. It will change how we define broadband probably going forward but it won't impact necessarily our investment in broadband. I'll let Karen talk about upgrade plan.

Phil, the other thing I might mention is there are new broadband speed upgrade plan. It really doesn't affect CAF-II because CAF-II is 10 meg down and 1 meg up so, so it's a lot lower than the new speed that they just announced. Now I'll let Karen talk.

I don't think there is much more to add there. I would just say in terms of the broadband speed. We've been talking over many other calls about the importance of GPON and our commitment to continue to get that cost structure down, cost per household down. We continue on with our consumer GPON that we've been talking about that’s the 10 markets good response. We like the halo effect that's just in new markets and then the business GPON equally important. So the fiber-to-the-node is still an important DOCSIS still very important technology. And when you carry that have fiber sets of markets with like first step of density you need all the technology plan for that.

Okay. And then second, can you just expand quickly for me on the realignment of the business and how that is going to slow things down, it doesn't look like 1Q you're looking for a whole lot of slowdown. Should we look for a sort of weaker middle of the year and then some acceleration in the back half?

Yes, so let me just kind of walk through that just quickly in terms of this is in a business segment and we have two segments that were sub-segmenting in going to market, we have a global segment which are 1,000 employees and more and then an enterprise less than 1,000. The enterprise segment is pretty much not impacted here. There is some changes. But the real integration of the former BSD, business solutions sellers which came from the network communication side of the company, and the CTS sellers they're in the global space, and that's where the integration is happening. And it really is working through customer portfolios. We've been very thoughtful about how we build customer modules, very thoughtful about, as Glen said, the product specialists that are important behind these sales executives and from there build the modules. So there is module changes, there is compensation changes, we really want sellers hunting more, and we're incenting them to do that. So it's just a transition to new comp structure and some new changes in customer portfolio. The sales we're hoping will be flat, but we're saying that we could be down a bit on first quarter which will impact us further quarters out. But I will tell you that across the board you talk to one of our global sellers they will say this is the right thing to do. We really needed that one stays to the customer and get the technical support behind that. So it's been embraced by changes always hard for an organization in particular sellers.

Does this create an opportunity to accelerate the EBITDA or the cost cutting?

You sound like, Stewart, now we'll take every opportunity. We do think obviously there are some attrition fees. We got to get the revenue trajectory the sell trajectory going for us. There are some attrition fees because you have more coverage right. You have better coverage with potentially you have less headcount. So the answer is yes, we got to let that all play through.

Thank you. Our next question comes from Frank Louthan from Raymond James.

What's the internal virtualization of your IT systems? How long you've been working on that and what sort of cost savings can you expect to see materialize and we've been talking for a little bit, for a while, about the larger customer churn and the hosting in co-lo business, what point do you expect to see that stabilize may be see a little bit better growth out of that business?

Yes, Frank. First of all virtualized IT systems I don't have a number to give you I haven't really disclosed that figure. But we're anticipating especially control significant ability to control our cost going forward. We're going to reduce cost initially, but we're taking all of our serve based systems, our non-mainframe systems, and moving them as we speak to our cloud. And we are closing data centers; we're reducing headcount in those areas. We are able to often do a lot of automation there and it is we think that the opportunities are significant to -- and as I said, not just reduce its current cost, but control cost going forward with this virtualization. So we're very confident in it and we are -- we believe we have -- we don't drink own bath water here, we don't do it ourselves, we think that the opportunities are really significant.

Frank, this is Karen. In terms of the co-location churn, the CTS organization have put in some changes towards the end of last year around compensation and contract, terms of contract that will have a benefit for us in 2015. We've targeted that churn to come down, we know that customers who are coming out of contract and it really is getting the right churn initiative programs in place to support that. So the -- the fourth quarter we had a large customer that wasn't with us long to churn on it and those are the kinds of profile we just have to make sure we have the right profile mix of types of customers and I think you'll see that continue to prove here in 2015.

What may be are you going to do differently to keep a customer that would come in and out that quickly on you?

Well we probably not enabled them in the first place, we start there. If it's just in terms of the risk of the customer, I think we're reassessing the types of risk of customers. So we're going to start on the front-end.

Thank you. Our next question comes from Mike McCormack from Jefferies. Your line is open. Please go ahead.

Stewart, maybe just a quick comment looking at the core revenue. Just looks on papers though unless they're going to be a significant or meaningful deceleration in strategic services that you're looking for, sort of continued steady losses on legacy side. I'm just trying to get a sense of what the thought process is there? And then, secondly, the broadband net adds, can you just give us a sense whether you're seeing gross adds coming in or better churn, and how do we think about sort of the intake on broadband? Thanks.

Yes, so Mike, on the core revenues, we believe we've bottomed out in terms of the decline of those revenues and hopefully we'll see continue to see lower declines with the exception of the low speed data services and we're hopeful that we're getting to the point there to where we've worked through most of the clients where had large customers, group networks, and see the effects of towers that we didn't get the fiber-to-the-tower. So we're hopeful that that will decline somewhat during 2015 in terms of the rate of the decline that we've been seeing. And from a strategic revenue standpoint I think the things that Karen has done with respect to the reorganization and the way our -- sales force is focused now the fact that we'll have an increased number of sellers on the street. I think we can drive the strategic products and services. I mean we've proven our ability to sell to the large MPLS networks and I think we just need to continue to focus on doing that and get some big deals in 2015 just like we did in 2014.

In terms of broadband, it really -- its not a churn issue for us in fact, we've done very well on the churn initiatives that we've had in place for over a year. It really is on the inward side and the inwards are really where we have the lower speed less dense markets or the ATM markets and our growth markets where we have fiber-to-the-node, GPON, higher speeds, where we've got the closure coming in. But its more challenging in those less dense markets where we don't have to see frankly is the inward issue there.

And Karen, you'd mentioned I guess price increases in the consumer side having a positive effect on revenue, where will you be able to take price on that, was it purely inside the Prism markets or can you take price elsewhere?

The price increases in Prism market are the faster the content cost. We are -- we have a pretty good methodology that we've used over the years in terms of kind of the lifecycle of products and price increases. And so we're just falling to kind of our process there, but you will see continued price increases in the different categories of -- really access lines in other places Prism as for the content cost.

Thank you. Our next question comes from Brett Feldman from Goldman Sachs. Your line is open. Please go ahead.

I actually want to go back and understand a little more about the low bandwidth data services. You mentioned that you're hoping the headwinds to moderate a little bit this year, what's left in that category, who are the key customers, what are the services they're buying and why do you think it should moderate and just in general putting aside the tower part, when that business churns off how much of it are you typically winning back to other services and to what extent just some of it just kind of go away?

Yes, so basically the customers there are the large telecommunications customers for the most part that's where the most of the revenue is. Again we believe we'll have some moderation this year in terms of the churn that we've seen in the network grooming and the copper to the towers that we've had that we've lost. And basically we think we haven't really shared the amount of revenue in that bucket. But suffice to say it should come down in terms of the numbers of losses that we see in 2015.

And when you lose it, do you tend to just lose it, or are you getting it back somewhere else?

Some of it we get back. So basically it goes to -- I think Ethernet service, and so basically our Ethernet revenues are cannibalizing the copper based revenues that we have. So there is some decline in revenue there and it typically takes a few years before the circuits get back to the point where you overcome the loss that you had in the copper circuit. So it requires a bandwidth increase over the Ethernet circuits over time in order to be able to achieve the same amount of revenue that we're effectively we're getting from the copper circuit.

Great. And just you mentioned the cash taxes for the year; I just didn’t quite get it, could you just repeat that again?

Yes, so that $25 million to $50 million, which is lower than what we had previously been stating because of the fact that almost depreciation was inactive.

So what happens the next year, does that inflect higher or is everything get pushed out another year?

Yes, it does. So 2016 our cash taxes would be $1.2 billion to $1.3 billion of which about $300 million of that are really taxes that relate to 2015, but because of the way that we can make our tax payment the cash doesn't go out the door for the big part of 2015 until 2016.

Thank you. And our final question for today comes from Simon Flannery from Morgan Stanley. Your line is open. Please go ahead.

Hi, this is Spencer for Simon. Two quick questions. So first the buyback slowed pretty meaningful in the second half and there was like quarter-over-quarter should we -- that's just a function of the higher stock price and should we expect that to be down somewhat this year? And then secondly, back in 2013, you mentioned expecting a similar inflection in the revenue for the second half of the year. Can you talk about how your expectations for this year are similar may be different from that? Thanks.

Yes, so in terms of the buyback we've spent little over $90 million in the quarter. We actually spent about $75 million in the month of January. So our -- the amount of money that we spend every day, the cash we spend every day is based on a matrix that we have under our 10b5-1 plan. And so we still expect to complete that program that $1 million program within the 24-month period from the time that we started that program which effectively was the end of May of 2014. So basically by the end of May of 2016, we would still expect to be complete that program.

Spencer, would you repeat the last part of your question, the last question?

Yes, sure. I think you guys had made comments previously about expecting acceleration for 2013 I think it was most because of the data hosting business but I was wondering if there is any analogue we can draw for this year in terms of your expectations are similar, acceleration for revenues at the back half?

Well it’s a combination of revenue growth I think and -- all across the strategic revenue. But it's -- the reason we believe that or confident that is that first of all we have increased our sales force, our distribution both direct, and in-direct. We realigned our sales force we talked about previously under Karen, combining our cloud and host again with network. We believe we're remaining underpenetrated in strategic products and services MPLS and Ethernet, we believe we're well positioned really take share back in these areas. Also we've invested this voice technology with SIP trunking features that give us more capability we believe. We -- and although as you mentioned our cloud and host results are not -- met our expectations to-date. The fact is demand for these services is still great and we are -- we believe we are making the right investments in these platforms especially in great automation of our cloud platform that we are rolling out of our Q3 acquisition. Together with a greater sales efficiencies, we expect that we can see -- we're going to see -- these the growth in our hosting cloud and colo sale this year. And then our recent acquisition, I mentioned, IP and big analytic services give us -- another significant product to combine these -- with our solution selling we believe can be effective. So we believe our results will ramp up during the course of the year and we know our plan is ambitious but we believe it's achievable.

Thank you. This concludes our question-and-answer session for today. I would now like to turn the conference back over to Mr. Glen Post for any closing remarks.

Thank you, Saeed. We are pleased with our solid 2014 operating and financial results and the continued improvement in our revenue trend. While we did experience slightly weaker results in the fourth quarter, we believe the reorganization and the investments we're making continue to position us to effectively compete in the marketplace and drive revenue growth from our strategic products and service in the month and years ahead. And we look forward to talking with you again soon. Thank you for joining our call today.

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