Tony Davis - CenturyLink, Inc. Glen F. Post - CenturyLink, Inc. R. Stewart Ewing - CenturyLink, Inc. Dean J. Douglas - CenturyLink, Inc. Maxine L. Moreau - CenturyLink, Inc..

David William Barden - Bank of America Merrill Lynch Amir Rozwadowski - Barclays Capital, Inc. Philip A. Cusick - JPMorgan Securities LLC Simon Flannery - Morgan Stanley & Co. LLC Matthew Niknam - Deutsche Bank Securities, Inc. Frank Garreth Louthan - Raymond James & Associates, Inc. Batya Levi - UBS Securities LLC.

Good day, ladies and gentlemen, and welcome to CenturyLink's fourth quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference 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, Brian. Good afternoon, everyone, and welcome to our call today to discuss CenturyLink's fourth quarter and full-year 2016 results released earlier this afternoon. Sorry for the few minutes' delay, but there was an operator error on our end. I won't call the name, but I think his initials were TD. And now I think we're off and ready to go.

So the slide presentation we'll 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'll open the call for Q&A. As you move to slide 2, you will find our Safe Harbor language.

We will be making certain forward-looking statements today, particularly as they pertain to guidance for first quarter and full year 2017, the pending sale of our data centers and colocation business, the pending Level 3 transaction, and other outlooks in our business.

So 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.

Moving to slide 3, we ask that you also note that our earnings release issued earlier this afternoon and the slide presentation and remarks made during this call contain certain non-GAAP financial measures.

Reconciliation between these non-GAAP financial measures and the most comparable GAAP financial measures are available in our earnings release and on our website at ir.centurylink.com. Now turning to slide 4, 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 portion of today's call will be Dean Douglas, CenturyLink's President of Enterprise Markets; and Maxine Moreau, CenturyLink's President of Consumer Markets.

Our call today will be available for telephone replay through February 16, 2017 and the webcast replay of our call will be available through March 2, 2017.

Anyone listening to a taped or a webcast replay or reading a written transcript of this call should note that all information presented is current only as of today, February 8, 2017 and should be considered valid only as of this date, regardless of the date heard or viewed. So as we move to slide 5, I'll now turn the call over to Glen Post.

Glen?.

Consumer, Enterprise and IT and Managed Services. We expect this realignment to drive greater focus on the customer experience and accelerate growth by enabling higher levels of operational focus, faster decision making, and market responsiveness as well as accountability. We're optimistic about our future.

Our path to growth won't necessarily be linear, but we are confident that we have the assets, the people and the right strategic focus to become one of the world's leading network service providers.

Finally, before Stewart reviews the quarterly results in more detail, I want to provide an update on the two transactions we have currently underway and moving to slide 9. First, as we announced on November 4 of last year, we have agreed to sell our data centers and colocation business to a consortium led by BC Partners and Medina Capital.

We received HSR approval and are in the process of obtaining final approval from CFIUS [Committee on Foreign Investment in the United States]. And we expect to close the transaction by the end of the first quarter of this year. In regards to the acquisition of Level 3, we're making progress in the approval and integration process.

We have completed all state and federal filings, and we expect to complete the necessary international filings within the next few weeks. Additionally, we have formed an Integration Management Office to coordinate and drive the integration planning process on this integration implementation once closing occurs.

We believe this combination will create significant benefits and growth opportunities for all our stakeholders including our customers, our employees and our shareholders.

First, this transaction will enable us to build scale and deliver agile network-based products and services to customers, and we really will be creating a new chapter with this combined company.

We also believe this combination with Level 3 will significantly improve CenturyLink's growth profile, better position the combined company to improve its revenue trend and grow. We expect it to drive meaningful operating cash flow growth in the first full year post closing, including synergies as realized and including integration costs.

We expect to drive more than 10% growth in free cash flow per share in the first full year post closing, including synergies as realized and, again, including integration cost. And we expect to drive significant improvement in free cash flow per share in subsequent years.

The transaction also enables accelerated recognition of Level 3 net operating losses, which will reduce the combined companies' net cash tax expense, positioning us to create enhanced free cash flow and lowering CenturyLink's dividend payout ratio.

We expect to be able to utilize the combined companies' strong product portfolios to bring the market even compelling solutions to the combined companies' customer base. We continue to expect to receive all the necessary approvals in a timely manner and close the acquisition, we believe, by the end of September 2017.

With that, I'll turn the call over to Stewart for a discussion of our financial results and guidance.

Stewart?.

Thank you, Glen. Over the next few minutes, I'll review the fourth quarter results and provide an overview of first quarter and full year 2017 guidance we included in our earnings release issued today.

Please note that I'll be reviewing some of the results, excluding special items, as outlined in our earnings release and associated financial schedules. Turning to slide 11, today, CenturyLink reported fourth quarter results with total and core revenues, operating cash flow, and adjusted diluted EPS all within our previously provided guidance ranges.

Fourth quarter operating revenue on a consolidated basis was $4.3 billion, a 4.2% decrease from fourth quarter 2015 operating revenues. Growth in Business high-band data services and Consumer Prism TV revenues was more than offset by lower legacy revenues.

Core revenue, which is defined as strategic revenue plus legacy revenue, was $3.86 billion for the fourth quarter, a decline of 4.1% from the year-ago period. Operating income, which includes approximately $200 million of costs related to severance and transaction costs, was $392 million for the fourth quarter of 2016.

We generated operating cash flow of approximately $1.59 billion for the fourth quarter and achieved an operating cash flow margin of 37%. Cash expenses for the fourth quarter increased $44 million year-over-year, primarily due to higher Prism TV content cost and group medical insurance cost.

Free cash flow defined as operating cash flow less cash paid for taxes, interest and capital expenditures, along with the cash impact of pension and OPEB cost, stock-based compensation and other income was $190 million for the quarter. Diluted earnings per share for the fourth quarter was $0.08, a decrease from $0.62 in the year-ago period.

Again, the diluted EPS result this quarter includes the after-tax impact of over $200 million of severance related and transaction cost. Now moving to slide 12 and our Business segment, in fourth quarter, the Business segment generated $2.55 billion in operating revenues, which decreased 4.1% from the same period a year ago.

Fourth quarter strategic revenues for the segment was $1.23 billion, an increase of 1.1% compared to fourth quarter 2015, driven primarily by the continued growth in high-bandwidth data services and VoIP revenues, partially offset by the decline in hosting revenues.

Legacy revenues for the segment declined 8.7% from fourth quarter 2015 due primarily to a continuing decline in voice and low-bandwidth data services revenues. Our data integration revenues decreased $10 million from fourth quarter a year ago due primarily to lower CPE sales. Total Business segment expenses were flat year-over-year.

Now, turning to slide 13 and the Consumer segment, which generated $1.45 billion in total operating revenues, a decline of 4.3% from fourth quarter 2015; strategic revenues in this segment grew 1.4% year-over-year to $784 million, driven by year-over-year growth in Prism TV revenues.

Legacy revenues for the Consumer segment declined 10.4% from fourth quarter a year ago, primarily due to access line declines and lower price increases in 2016. Operating expenses increased $15 million or 2.4% compared to the same period a year ago primarily due to higher Prism TV content cost.

Now, turning to slide 14 and our guidance, our guidance for 2017 assumes that we own the colocation business for the full year. To adjust for the sale of the colocation business, you can remove revenue of $50 million per month and expense of $25 million to $30 million per month from the closing date through the remainder of 2017.

The anticipated free cash flow on the sale is estimated to be a reduction of $5 million to $10 million per month. Our guidance also assumes cash income taxes to be between $500 million and $600 million in 2017 and that we make $100 million discretionary contribution to our pension plan.

For first quarter 2017, we expect operating revenues of $4.23 billion to $4.9 billion (sic) [$4.29 billion], core revenues of $3.8 billion to $3.86 billion, and operating cash flow between $1.49 billion and $1.55 billion. Adjusted diluted EPS is expected to range from $0.51 to $0.57.

In first quarter, we expect continued growth in strategic revenues to be offset by anticipated declines in legacy revenues, resulting in lower first quarter 2017 core and operating revenues compared to fourth quarter 2016.

First quarter 2017 operating cash flow is expected to be lower compared to fourth quarter 2016, primarily due to the anticipated decline in revenues and higher operating expenses primarily related to employee benefit and marketing cost, along with the impact of approximately $40 million of favorable expense adjustments in the fourth quarter 2016.

For full year 2017, we expect operating revenues of $17.05 billion to $17.3 billion, core revenues of $15.25 billion to $15.5 billion, and operating cash flow between $6.15 billion to $6.35 billion. Adjusted diluted EPS is expected to range from $2.10 to $2.30 per share.

We expect free cash flow of $1.55 billion to $1.75 billion, including capital expenditures of approximately $2.6 billion. We anticipate lower operating revenues and core revenues in full year 2017 compared to 2016 due to expected legacy revenue declines more than offsetting anticipated increases in strategic revenue growth.

Full year 2017 operating cash flow is expected to decline from 2016, primarily driven by the continued decline in legacy voice and low-bandwidth data services revenues. The company also anticipates a decline of approximately $150 million in depreciation and amortization expense for full year 2017 compared to 2016.

In addition, 2017 includes an approximate $70 million increase in pension expense, which of course is a non-cash item. This non-cash item accounts for over two-thirds of the difference between the midpoint of our 2017 operating cash flow guidance and average analyst consensus estimates for 2017 operating cash flow.

Free cash flow for full year 2017 is expected to decline from 2016 due to the lower level of operating cash flow and an increase in cash income taxes for the year, partially offset by lower capital expenditures. We expect our dividend payout ratio to be in the low 70% range for 2017.

While we continue to face pressure related to strategic revenue growth and our legacy revenue declines, as Glen mentioned earlier, we are confident in our business and our ability to improve the revenue and operating cash flow trajectory over time. Now I'll ask the operator to begin the Q&A portion of the call..

Thank you, sir. Our first question will come from the line of David Barden with Bank of America. Please proceed..

Hey, guys. Thanks for taking the questions, a couple if I could. The first one would be on the guidance.

Stewart, if I multiply the midpoint of your revenue and your EBITDA guidance by four, you get below the low end of the full-year guidance for revenue and operating cash flow, which would imply that you're guiding to revenues U-turning and EBITDA U-turning in the following quarters, which would be a pretty big milestone for CenturyLink looking at the historical trending data.

So if you could elaborate a little bit on that, that would be super helpful. And then the second question would be on the CapEx. I think you said that there was some element of the pending Level 3 merger that was in the lower CapEx number. Obviously, there are some CapEx synergies that are baked into the hypothetical merger model. I'm wondering.

Are we pulling those forward into the current guidance, or is the money you're not spending now in addition to the money that you might incrementally not spend with the Level 3 deal? And then my last one if I could just real quick is when you're thinking that the Level 3 vote will get scheduled. Thanks..

So, David, on the guidance, you're correct. We believe that basically we will be able to improve throughout the year in terms of the revenue from the standpoint – especially in the latter half of the year.

The Consumer business, basically we're working very diligently on penetrating the customers that we built to from the standpoint of increasing the seeds available to them. We're working on reducing our churn rate.

So we have mitigation programs in place that, based on the trends we've seen in the last couple quarters, we think we're going to be able to show an improvement from a customer standpoint.

Dean, do you want to talk about Enterprise for just a minute?.

Sure. On the Enterprise side, we believe that we'll continue to see a nice ramp up of our revenues associated with the Enterprise business for three reasons.

The first reason is that when we look at our backlog, our booked backlog, we see an improvement of 40% improvement in our booked business going forward from the first part of 2016 through the first part of 2017. The second piece is that we are replacing our Ethernet products.

We had four Ethernet products in the marketplace that are now being replaced by a single Ethernet product. It's available at all 35 of our markets. It's MEF 2.0 compliant. So it's a current product, consistent with what we're seeing in the marketplace with our competitors.

And the third piece is that we continue to enjoy some nice performance improvements in our MPLS business combined with our SD-WAN business, which is going through a number of POPs with our customers, and we believe that those POPs will become real revenue generating business opportunities in the second half of 2017..

And in IT Services and Managed Services, we're seeing – first of all, we have a sales force in place now that we really didn't have last year.

Basically, we were using our selling team that was part of Dean's organization to sell those services, and we basically came to the conclusion that we needed to revamp and stand up a sales team again, which we've done during the latter part of 2016. And we're starting to show some progress there.

So we think we can turn around the reduction in IT Services and Managed Services that we've seen over time as a result of that.

Glen, you want to address CapEx?.

I will. Regarding CapEx, we're not pulling forward synergies from the Level 3 transaction. This is really pausing our work here to be sure we're investing in the right areas. As we said earlier, we've built a lot of capacity and a lot of capability in the network, and we have a lot of range or capacity to sell into now.

And we think it's the right thing to be sure we're spending in the right areas and to be sure we're not spending in areas that there's overlap with the Level 3 assets.

So we think it's wise to pause for a minute and the impact for us is – if you look at what the impact could be we think it's most – we talked about in our top 25 markets (32:41) over 90% of our households and business having 40 megabits capabilities. That could go down to maybe 86% – 87%. If you look at 100 megabits, we anticipate over 70%.

That could probably be at the 67%, 68%. So we're not talking about big impacts and then we would make that up in 2020 if we didn't hit those targets. So it's only a slight miss based on the reduced CapEx..

And just quick on the potential timing for the Level 3 vote?.

We expect the proxy to be out....

Within the week..

Within the week..

And meeting sometime in mid-March..

Meeting in mid-March..

Great. All right, thanks, guys. Good luck..

Thanks..

Thank you. Our next question will come to the line of Amir Rozwadowski with Barclays. Please proceed..

Thanks very much. Just filling on some of the prior questions, it does seem as though that you folks experienced a material improvement in terms of your broadband subs.

How should we think about the progress there and outlook? It does seem as though your expenses were bit higher in the Consumer arena, so just want to understand how to think about the positioning of that business going forward, particularly as its contribution to the overall joint entity will be lighter post the Level 3 deal..

Well, first of all, we're seeing partially the results of the build-out of greater capacity and greater speeds in the network and that's starting to pay off. As I pointed earlier, we're seeing most of those customers in the 40 megabits range for us where we're seeing the real high take rates of our service. That's one of the issues.

We've also made major progress on churn. We see the improvement in churn just working to make sure we can improve the customer experience and that we're making sure we're more competitive in the marketplace in certain areas. So, long term, we think that we can drive cash flow in this business and we'll see continued improvement in the units.

I would say that we'll look more deeply into Consumer; how we approach Consumer going forward.

It'll be a low percentage of our business after we complete the acquisition of Level 3, but it's still really a strong business where I believe with the network advantage that we have, we continue to have good success in competing in that Consumer marketplace..

And expenses were a bit higher in the Consumer business, and this is principally driven by the increase in the subscribers that we have to our Prism TV service. So it's a content cost associated with that.

I can tell you that, basically, we will work to try to mitigate expenses in the Consumer area from the standpoint of the approach to the market from a broadband perspective. I think we're going to be more efficient with respect to marketing to our broadband customers.

We're simplifying our offerings, which will make it – we believe make them easier to sell, make them stickier with our customers and also allow us to market them at a lower cost from an expense standpoint, lower marketing cost than we're incurring today..

Great. And just one follow-up, if I may.

If we look at your earnings outlook for next year, should we assume that you folks have fully baked in that 7% to 8% employee cost reduction that you had highlighted?.

Yeah. Yes, it's fully baked into the guidance that we given..

Great. Thanks very much for the incremental color..

Thank you. Our next question will come from the line of Philip Cusick with JPMorgan. Please proceed..

Hey, guys. Thanks. It's been a few months now since you announced the Level 3 deal.

Can you give us an update on synergy expectations? As well, can you help us understand the level of cash taxes you expect to pay with Level 3 under the current tax regime? Certainly not in zero, but can you give us a range? Do you expect it to be a quarter, half or more of the gap level? And then, finally, how are we thinking about leadership of the combined company operations? Are Dean and Maxine going to be in charge of their respective combined businesses or is this just for this year before the deal closes? Thank you..

Yeah, Phil, regarding the synergy expectations, those are still – we have not changed those expectations. However, I think we're comfortable than we were even before as we got deeper into the potential of bringing these companies together that we can and will achieve those announced synergies.

We have $850 million of operating synergies, plus $125 million of CapEx synergies, and we believe those are very achievable at this point and we are confident in those..

And in terms of the utilization of NOL and the impact on cash taxes, if nothing changes from an income tax standpoint, regulation standpoint, we would expect to use the NOL that Level 3 brings over about the first five years or so after we close, so about a $2 billion utilization of NOL, so you could just take the statutory tax rate times that.

So, let's say this is about $700 a year or so in cash taxes..

And then on the management structure, we have not announced anything there yet. We expect to do that probably by early March as far as the Tier 1, those executive reporting directly to me. So we're working through that as we speak and will hopefully – again, I hope to announce that by early March..

All right, thank you..

Thank you. Our next question will come from the line of Simon Flannery with Morgan Stanley. Please proceed..

Great, thank you. So, Dean, you mentioned the backlog number being up 40%. Perhaps you can just elaborate a little bit more on that. You talked about some of the product developments.

Is there anything going on in the broader economy or in the broader competitive environment? Now we've seen some better confidence numbers, any color you could provide us about what's going on in the marketplace would be great.

And then I think, Glen, you talked about reviewing over-the-top and trialing some of that and thinking about how that impacts Prism. Perhaps you could just expand a little bit more about what we should expect from Prism and over-the-top in 2017. Thanks..

All right. So as we – if we look at the marketplace and some of the trends in the marketplace, as I mentioned, we got a new Ethernet product that we brought to the marketplace and is available in all 35 markets. It's a single product that combines four prior products, so we simplified our portfolio.

It makes it easier to provision and we believe that the speed of provisioning and, therefore, the speed of revenue is going to be greater going forward in the Ethernet product. In MPLS, we are enjoying some success in MPLS. In the fourth quarter, we believe that we actually grew market share on an MPLS standpoint. Market grew about 4.3%.

We grew roughly 4.9%. So a difference in our growth versus where we are in the marketplace and that obviously provides us with some confidence going forward.

The SD-WAN product has started to enjoy some market acceptance in terms of POCs and trials that are going on in the marketplace and we'll see that really grow in terms of interest in the product as well as in actual conversions to a SDN platform.

We've moved many of our facilities to be able to be virtualized and take advantage of the SD-WAN product, about 50% of the network to-date, and we continue to drive towards that so that the entire network is capable of working through that SD-WAN platform.

So, in terms of products, technology that we are seeing and our own ability to manage our business, our backlog, our provisioning and the like better in the latter part of 2016 I think bodes very well for where we're going in 2017..

So, customer behavior is pretty stable, industry growth is stable?.

Yeah. We've got the challenges that most of our competitors have in terms of pricing and the like, but we are seeing a churn level that's actually reduced year-on-year, and so we think that not only is the customer acceptance solid, but we are seeing that manifest itself in new product acquisition as well as in our churn numbers..

Okay. Thank you..

Simon, I'll start on OTT and Maxine may want to add to this. But if you look at our Prism product, as you know, we've talked about content costs have really gone out of sight the last couple of years. If you look at the margins, sometimes actually negative margins.

But we certainly – we have to make a truck roll and the cost of provisioning really makes it difficult from a returns standpoint for really driving the kind of returns we expect. With over-the-top product, we don't have to make a truck roll. We have much wider availability due to lower bandwidth requirements of over-the-top.

We have network-based storage for DVR. We'll have local channels to help distinguish that product. And our trial is getting really strong reviews right now. But we have really deemphasized the Prism product because of the margin issue. Now the value there is the pull-through.

We get a strong pull-through, 90% pull-through of additional services, and 50% of those customers are new customers to CenturyLink. So that's the real value here of the Prism product. But we have deemphasized that and moving more toward the over-the-top product and also focusing more on the broadband offerings we have versus the video.

Maxine, do you have anything? That's all we need to say..

Are we going to see the rollout by the middle of the year, or what's the expectation?.

We'll start rolling out by midyear – around midyear the over-the-top..

We're in trial right now in four markets. We plan to launch those markets in early second quarter, expand that midyear, and then further expand it throughout the year..

Thank you..

Thank you. Our next question will come from the line of Matthew Niknam with Deutsche Bank. Please proceed..

Hey, guys. Thank you for taking the questions, just two, if I could, one on Business high-bandwidth revenues. If we just think about the trends up until now, I know there's an expectation revenue growth reaccelerates.

But maybe if you can talk to the slowing growth to date, is that more company-specific, or is there a competitive element you're seeing more as well? And then secondly, maybe a question for Glen on the regulatory front.

How do potential changes in the regulatory environment like corporate tax reform or less regulation at the SEC level change how you think about CapEx priorities? Thanks..

Okay.

Dean, do you want to take the first one?.

So first of all, with regard to Business high-bandwidth growth, a couple things that you need to be mindful of. As I said, we introduced a new Ethernet product. And so obviously, we have a product in the marketplace that clearly needed to be replaced, and so we invested to do that.

But I think that the other piece that we really need to focus in on is in the middle part of the year we changed the focus of our business so that we were focused on our customers and routes to market, specific routes to market.

And so that management team was put in place in the middle part of the year, and we started to see the benefits of that new organizational structure towards the latter part of the fourth quarter as we looked at our business going forward. And so that's why 2017 is different than 2016.

The way we're going to market as well as the products we're taking to market are different. And then the intervals that I mentioned earlier because of the way in which we provision our products now and the simplified product portfolio shorten the amount of time from sale to revenue..

Matthew, regarding the (46:02) given all the noise around tax reform, I believe that we're going to see the President and the administration and the Congress initiate. I think tax laws are going to be good for businesses in general. I think we're going to see it drive economic development, incentive for investment.

I don't think it impacts our priorities really. Our priority is really to invest in our network to drive additional speeds, opportunity to bring new products and service to our customers, expand our offering to additional – scope to additional areas of the country, really improve our fiber connectivity and the related services. So those will continue.

I just want to point out, one investment we made this year that we'll start begin seeing real benefit of going forward as far as our network investment, we have virtualized about 60% of our major IP POPs as of the end of 2016. And we plan to have 100% of those virtualized by the end of 2019.

We also have almost 50% of our network capabilities currently controlled through our SDN network, so virtualization of those capabilities. We have virtualized WAN service availability, virtualized interconnect between VPN customers, just a number of virtualization steps we've taken. Again, 50% of those capabilities are virtualized today.

Once we complete those, we expect to save over $200 million a year in CapEx. By about 2019, we expect those to complete, and we expect significant savings there. And also, we expect major OpEx cost savings as a result of this virtualization of the SDN, NFV network builds.

So those are the type of investments we'll continue to make, making our network more efficient. Also just the incremental revenue opportunity of virtualization, we think it can have significant impact on the revenue opportunity for a couple reasons. First of all, it becomes more customer-friendly.

The customers can control their own destiny to a certain degree, how they distribute their bandwidth, for instance. And it enables us to cover a lot more businesses. When you virtualize, you go outside your current territories to many more businesses than you otherwise could reach.

Today, just what we've done thus far with the 60% virtualization, we're reaching 4.8 million businesses. A large amount of those were business we could not previously sell to. So that's the type of advancements we're seeing. We think it can really help reduce our cost as well as provide revenue opportunities..

Sorry, if I could just go back to Dean's comment, I just want to be clear. So the deceleration to date, it seems like a lot of these were company-specific product set execution.

But was there any change in the broader market spending environment or just competitive landscape in recent quarters to be aware of?.

We've tried to address the competitive posture by the routes to market that I disclosed – that I talked about just a moment ago. The routes to market really do allow us to have a more segmented approach to the way in which we're going to market and reaching our customers, and we believe that that provides us a differentiated go-to-market approach.

And, obviously, we're seeing that manifest itself in some areas. For example, as I mentioned, we grew market share in the fourth quarter in the MPLS market space..

Got it, thank you..

Thank you. Our next question will come from the line of Frank Louthan with Raymond James. Please proceed..

Great. Thank you.

Can you talk to us a little bit more specifically about the expectations for the CAF spend in 2017? And then, can you give us a little color on sort of your overlap with the Level 3 network and what your expectations might be for any sort of any potential divestitures or other resale obligations you might need to incur as a remedy for the deal? Is that something you're expecting?.

Yeah, Frank, on the CAF 2, Stewart can answer more specifically. The reduction in our CapEx will not affect the CAF 2 spend. We're not going to reduce that spend with the reduction in our planned CapEx for 2017..

Yeah. So, Frank, at the end of the year, we had a little less than 30% of the build-out done in terms of the homes that we've obligated ourselves to pass with the 10 meg down, 1 meg up. By the end of 2017, we expect to be about in the 40% range. So it's on schedule with what we had anticipated.

And, frankly, that should help us with our broadband adds in 2017 as well..

And, Frank, we do think there could be some required divestitures of certain properties in certain markets where we have just Level 3 and CenturyLink the only ways into the building, so we could do some of that, but we don't know that we'll see that or not. But there could be some divestitures. We have not heard any feedback on this yet..

Okay, great. Thank you..

Hey, Frank, what we're able to do with the other deals that we've done in the past, with the Qwest transaction for instance, we were able to agree where we had the only entrances to a building to basically provide CLECs and others an entrance for a flat fee basically for a period of time. So we weren't required to divest there..

Thank you. Our next question will come from the line of Batya Levi with UBS. Please proceed..

Great. Thank you. A follow-up on the over-the-top question.

As you develop plans and trial this product, do you think that you'll just keep it developed internally or would you consider a third-party solution like AT&T's DIRECTV NOW? Maybe can you provide some color around how much CapEx you spent on Prism TV in 2016 that seems to be coming off the budget? And a final question on the fiber assets that you have.

A lot of discussions right now that as the carriers plan for 5G, they need more fiber.

How do you think the company with Level 3 is positioned and what are some plans to capture that demand?.

First of all, Batya, on the over-the-top, we're looking at every option. If we can get a better deal or we can get some of our content cost down and get the same type of service available with a DIRECTV NOW, we'll certainly take a look at that. We are talking to all of our service providers, looking at every possibility there..

And CapEx for Prism, Batya, in 2016 that would be coming off, basically we have two head-ends and they're built and in place. And there's no – really minimal CapEx to maintain those.

Most of the CapEx that we're incurring now related to Prism is success-based from the standpoint of set-top boxes that we have to purchase when we add a customer, but really the investment is more for broadband than it is from a Prism TV standpoint. So the amount that would be coming out would be minimal..

And regarding the 5G, the need for bandwidth there, we're talking with the potential carriers of the – or providers of the 5G capability, and certainly there are opportunities there. We have not quantified it yet.

We really don't know what that would be, but we're certainly working with those carriers to consider the opportunities there, especially where we have fiber access and transport capabilities..

Okay. Thank you..

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.

Sir?.

Thank you, Brian. I am pleased with the progress we've made in 2016, but there's certainly more to be done. We have dedicated and passionate and capable employees around the world who approach their responsibilities each day with a customer-centric mindset and with a sense of urgency. They are a great asset, a great advantage for us.

We have a strong set of assets and the financial strength to continue to invest in our future, and we have the strategic clarity of how we will grow our business by connecting our customers to the digital world. So we're excited and inspired by the opportunities we see for our customers, for our employees and our shareholders.

We plan to continue to leverage and position our assets to drive future revenue growth, EBITDA growth, and shareholder value. And although our growth – as we've seen before, our growth may not be perfectly linear in the months ahead, I'm confident that we're on a path to long-term growth and value creation.

So thank you for joining our call today, and we look forward to speaking with you in the weeks ahead..

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may all disconnect. Everybody, have a wonderful day..