Lumen Technologies Inc (LUMN) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to CenturyTel's third quarter 2003 earnings release conference call.

At this time, all participants have been placed in a listen-only mode, and we will open the floor for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Tony Davis, Vice President of Investor Relations.

Sir, you may begin.

Thank you, Jennifer.

Good morning, everyone, and welcome to our conference call to discuss CenturyTel's third quarter 2003 earnings results released earlier today.

During today's call we will be referring to certain non-GAAP financial measures.

We have reconciled these measures to GAAP figures in our earnings release, which is available on our website at www.centurytel.com.

Your host for today's call is Glen Post, Chairman and Chief Executive Officer of CenturyTel.

Joining Glen on the call today is Stewart Ewing, CenturyTel's Executive Vice President and Chief Financial Officer.

Also available during the call today is Karen Puckett, CenturyTel's President and Chief Operating Officer.

We will be making certain forward-looking statements during our call today, particularly as they pertain to guidance for fourth quarter 2003 and other outlooks in our business.

Therefore, we do ask that you review our Safe Harbor language found 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.

Further, for anyone listening to a taped or webcast replay of this call, or for anyone reviewing a written transcript of today's call, please note that all information presented is current only as of October 30, 2003 and should be considered valid only as of October 30, 2003, regardless of the date listened to or reviewed.

At this time I'd like to turn the call over to your host today, Glen Post.

Glen?

Thanks, Tony.

Appreciate you joining our call today as we review CenturyTel's third quarter 2003 financial results.

We will also review our fourth quarter and full year 2003 guidance as outlined in our earnings release issued earlier today.

CenturyTel continued to achieve solid financial results in the third quarter with results meeting or exceeding both our guidance and street estimates.

The Missouri wire line properties acquired from Verizon on August 31st, 2002 along with continued success in driving further penetration of calling features, long distance and internet services in our wire line customer base were the primary drivers of our growth over third quarter 2002.

Our transition to a pure play rural local exchange carrier has had a positive impact on our free cash flow generation during 2003 allowing us, we believe, to de-lever our balance sheet and help position us for future growth opportunities.

Or financial performance for the third quarter is primarily driven by better margins in our long distance service than expected, lower depreciation expense and originally forecast along with lower interest expense than originally anticipated.

Revenue from continuing operations increased 13.5% to $603.8 million for the quarter.

Our consolidated internal revenue growth rate for the quarter was 3.3%, which we believe represents solid growth given the challenging economic and industry environment we continue to face today.

Operating cash flow from continuing operations for the quarter, excluding non-recurring items, increased 12.7% to $307.6 million.

CenturyTel's earnings per share for the third quarter of '03, excluding non-recurring items, was 61 cents a share, or 2 cents ahead of first call consensus estimates at 59 cents per share.

We added more than 24,800 long distance customers during the quarter.

As of September 30th, CenturyTel provides long distance service to more than 745,000 customers, which represents approximately 31% penetration of our total access lines.

Our customers continue to show strong demand for high speed internet service as we added more than 8300 DSL customers during the quarter, a new quarterly net additions record for CenturyTel.

Our DSL subscriber base has grown to more than 76,000 customers, reflecting more than 44% growth since year end 2002.

We experienced another strong quarter of free cash flow generation, excluding non-recurring items, free cash flow for the quarter was $103.1 million.

This brings our free cash flow generation for the first nine months of '03 to nearly $352 million.

Over the third quarter -- overall, the third quarter represents another quarter of solid operating results and continued improvement in the financial strength of our company.

At this time I'll ask Stewart Ewing, CenturyTel's Chief Financial Officer, to provide additional detail on our results for the quarter and to update you on our financial guidance for the fourth quarter and full year 2003.

Stewart?

Thank you, Glen.

I'll start today by first covering the telephone operations results and then review the results of our other operations.

I'll then briefly touch on our capital structure position and conclude my remarks with a brief discussion of the guidance provided in our earnings release.

First, in our telephone operations, telephone revenues increased 11.3% to $521.4 million.

The Missouri properties acquired from Verizon at the end of August in 2002 contributed approximately $44.5 million of the increase.

The internal revenue growth rate for our telephone segment was 1.2% during the third quarter.

On a consolidated basis, including our other operations segment, our internal revenue growth rate was 3.3%.

We believe the economic environment in our service areas, product substitution and competition in selective markets continue to impact our revenue growth.

Data revenue growth, excluding the Missouri properties acquired in August of 2002 and including our internet business, was up 14%.

CenturyTel ended the quarter with 2,394,623 total access lines and a little over 3.8 million voice grade equivalents.

We experienced a loss of approximately 8,700 access lines during the quarter.

Since the fourth quarter has historically been our softest quarter each year in terms of access line growth, we continue to anticipate one to two percent access line losses for the full year 2003.

Operating cash flow for CenturyTel's telephone operations, excluding non-recurring items, increased 10.8% to $284.3 million from third quarter last year.

Our telephone cash flow margin, excluding non-recurring items, was 54.5%, compared with 54.8% in third quarter 2002.

Telephone revenues for the third quarter were higher than we originally anticipated while telephone expenses were also higher than expected, primarily due to higher bad debt expense and costs associated with implementation of the new billing system.

Operating income, excluding non-recurring items for CenturyTel's wire line operations, increased 13.4% to $172.6 million from $152.3 million in third quarter 2002.

Our operating income margin, again excluding non-recurring items, was 33.1% compared with 32.5% in third quarter 2002.

We experienced lower depreciation expense than originally forecast due to discontinuance of depreciation on over-depreciated assets and lower capital expenditures than originally planned.

As a result of our fourth quarter capital plans, we would expect the depreciation expense to increase this current quarter.

We expect our composite depreciation rate to remain in the 6.9 to 7% range.

The Alabama and Missouri properties continue to perform in line with our expectations and we continue to run ahead of our original revenue growth plan for these markets.

As of the end of the third quarter we had generated an incremental annual revenue run rate of more than $43 million from the sale of products and services to our customers in these markets, these being primarily long distance service, internet service and some of the other vertical services.

Turning our attention to the results from our other operations segment, we continue to experience solid growth and improving results in our other operations, which includes long distance, internet, our fiber transport business, and Celek operations.

Other operations revenues increased 29.5% to $82.3 million.

Operating cash flow for other operations increased 32.8% to $23.3 million from $17.6 million in third quarter last year.

Operating income for other operations increased to $18.1 million from $14.4 million in the third quarter of 2002, primarily due to improved profitability in our long distance operations.

Long distance revenue increased to $45.2 million dollars, a 14.2% increase.

Long distance operating income was $13.6 million for the quarter compared to $9.8 million in third quarter 2002, a 39.4% increase.

We experienced higher than anticipated margins in our long distance business primarily due to decreased transport and off net termination costs.

We added more than 24,800 long distance customers during the quarter, bringing our total long distance customers to over 745,000.

Long distance customer penetration in our local exchanges as a percentage of total access lines reached 31.1% at September 30, versus 26.5% at the end of 2002.

Internet revenues, which include both dial up and DSL, increased 36.5% to $20.5 million for the quarter.

Again, we had a record quarter in terms of DSL subscriber adds as we added 8,300 customers and ended the quarter with more than 76,300 DSL subscribers, or about a 5.2% penetration rate of our total DSL-enabled lines.

Fiber transport revenues increased $6.9 million, primarily due to the fiber asset acquisition from Digital Teleport, Inc. in June of this year, which is now operated as Whitecorp.

Now I'd like to make a few comments regarding cash flow and capital structure.

As Glen mentioned earlier, CenturyTel continues to drive strong free cash flow from our business generating a little over $350 million of free cash flow for the first nine months of this year.

This represents a little over $100 million increase, or a 41.5% increase over the $248.5 million generated in the first nine months of last year.

We believe these strong free cash flows are driven primarily by the contribution of the Alabama-Missouri wire line properties acquired in 2002 and the lower capital expenditures in the first nine months of 2003 as compared with the first nine months of last year, about $42 million lower this year than last year.

As of September 30, 2003, CenturyTel's debt to equity ratio remained below 1 to 1.

And as of the ends of September there were no borrowings outstanding under our $533 million, three-year revolver, and we had cash and cash equivalents of nearly $158 million.

So, CenturyTel continues to strengthen its financial position, providing excellent liquidity and flexibility to support our business strategies.

Finally, I would like to review the 2003 guidance provided in our third quarter earnings release and make a couple of comments regarding 2004 guidance.

We expect to give guidance for 2004 during our fourth quarter earnings call.

Such guidance will include approximately $10 to $15 million of incremental cash expenses associated with implementation of our new billing system.

I mention this now so that you're aware of this as you build your models for next year.

Now for our guidance for the remainder of 2003, which excludes non-recurring items.

As we stated in prior earnings calls, due to the new rulings, Regulation G implemented by the SEC relating to the reporting of non-GAAP financial measures, we no longer provide EBITDA or operating cash flow guidance on a quarterly basis.

We've chosen to continue to provide revenue and diluted EPS guidance for fourth quarter of this year.

For the fourth quarter of this year, we anticipate total revenues will range from $600 million to $615 million.

We also expect earnings per share to be in the range of 58 to 62 cents for fourth quarter.

For the full year 2003 we have again increased our 2003 diluted earnings per share from the previous $2.28 to $2.34 range to an anticipated range of $2.36 to $2.40 per share.

The primary reason for the increase in our annual EPS is the fact that our third quarter results exceeded our expectations.

This concludes our prepared remarks.

We'll now open the call for a few questions.

Thank you.

Ladies and gentlemen, the floor is now open for questions.

If you have any questions or comments, please press the numbers 1 followed by 4 on your touch phone phone at this time.

Pressing 1, 4 and second time will remove you from the queue should your question be answered.

Lastly, we do ask while posing your question that you please pick up your handset if listening on speakerphone for optimum sound quality.

Please pause while we poll for questions.

Our first question is coming from Mike Bellhoff.

Please state your affiliation, then pose your question.

I'm from Legg Mason.

Good quarter.

A couple of questions.

First of all, access revenue obviously increased pretty strongly by my calculation, up from over a dollar per line, per month from one quarter ago.

I assume that a certain amount of that is related to the access revenue increase.

Is there something else that's going on there?

That's one question.

A second question relates to the Arkansas rate case.

If you could give us an update on where you see that going, going forward.

And the third issue relates to competition in Missouri.

If you could update us on what's happening there.

Thank you.

Mike, the increase in access revenue really resulted from an increase in expenses in the quarter and also an increase in our minutes of use .

We saw some growth in minutes of use in the third quarter.

Concerning the Arkansas rate case, the Arkansas Public Utility Commission staff has recommended in their testimony a $2.5 million increase.

In our reply testimony, which we are filing today, we suggest an increase of $15.5 million.

The staff is scheduled to file their reply to our testimony on November 20th.

And, you know, again, we kinds of -- we expect this to get resolved in the first quarter of next year as we'll work with the commission between now and then to try to complete the rate case.

Mike, regarding the competition in Missouri, there's really no major changes there.

Of course, charter has a triple play there around markets in St. Charles County.

But there's really been no major changes there.

We've rolled out our extended local offering and our integrated bundle plan there.

We've really seen a reduction in loss of lines there and we've actually gained back about 15% of the customers we lost in those markets.

So, it's -- we've still got strong competition, but we're holding our own there.

Glen, you had indicated previously that you had gained a fair amount of traction in that particular property.

Has it improved further since the August-September time frame when you were reporting to us before that you had gained traction?

I'll let Karen address that, Mike.

Mike, in general, yes, we actually month-by-month continue to gain traction in decreasing the disconnect (inaudible).

Okay.

One other follow-up question related to the minutes of use.

I know, Stewart, that you're not inclined to give us what the minutes of use numbers are, but can you give us the -- you said it improved.

Can you give us some sort of quantification for the improvement?

This is Glen, Mike.

Yeah, the minutes of use actually, excluding the Verizon acquisition, total minutes of use increased a little over 3%.

Good.

Thank you very much.

Thank you.

Our next question is coming from Frank Louthan.

Please state your affiliation, then pose your question.

Frank Louthan with Raymond James.

Again, just looking at the margins in the quarter, is this sort of a run rate here on the wire line side?

Has the bad debt sort of normalized here?

What can we look for going forward?

And then, any comments on dividends, any potential changes there the Board may be considering?

And what sort of tax rate should we be looking at going forward?

Thank you.

Frank, in terms of the margins this quarter and the run rate going forward, you know, it's always hard to predict, but, you know, we don't see any deterioration really right now and expect any deterioration really for the fourth quarter.

So, you know, hopefully we can hold our own then, and we'll give guidance for 2004 at the end of the fourth quarter.

But at this -- but you know, there is competition in our business and we expect that going forward.

And, you know, we're adjusting to work through that.

Frank, regarding the dividends, first of all, we are generating a lot of free cash flow, as we've commented.

As we've stated before, our initial focus there and goal there is to reduce our leverage, reduce debt.

The second look -- we're giving there a second focus toward acquisition opportunities.

There's nothing, you know, really there imminent today, but we think there will be opportunities in the months ahead.

If that doesn't occur in the next 12 months or so, then certainly I'm sure our Board will be looking at the options of either increasing dividends, stock buybacks.

We're not in the business of hoarding cash, so we're -- we will be looking at all those options.

And Frank, the effective tax rate in the third quarter was 35.5%, and that's really pretty consistent through the year, with the first nine months.

Expect going forward, though, the effective tax rate to probably increase slightly, maybe to 36%, or maybe 36.5% on the top side just due to, you know, some of the states basically getting more aggressive in terms of some of their tax rates and some, you know, issues in some of the states.

Great.

One follow-up.

Is any part of the improved margins on LD coming from putting some more traffic on your own network, possibly on the new fiber that you bought, or is it all really coming from pricing pressure on the wholesale markets?

Thanks.

We are putting more on our own network, not in the new Whitecorp yet.

We're still working through transitioning that, but not from this quarter, in terms of benefit.

However, we are putting more on our own network through other means.

Okay.

Great.

Thank you.

Thank you.

Our next question is coming from Cannon Carr.

Please state your affiliation, then pose your question.

Hey, guys.

CIBC World Markets.

Good quarter.

Stepping back and looking over the next two years, I'm just curious, after the Verizon acquisitions have played through, and I know you don't want to give guidance for 2004, maybe what are the growth drivers that we should be thinking about over the next two years to drive top line growth and maybe even EBITDA growth?

Those are issues of course that we deal with daily, (inaudible).

There are really four drivers of growth, revenue growth, and of course, earnings growth over time.

Of course, there's access line growth, customer growth.

Secondly it's minutes of use growth, access minutes growth.

Then there's, of course, penetration of services, long distance, calling features, DSL, voice mail, et cetera.

And then, finally, deployment of new services, which we've -- of course, DSL being one of those the last few years, and we hope there will be others in the months ahead.

So, primarily we think the growth will come from the data side, data services.

But we really need access line growth here to drive, you know, really stronger growth, sustained growth.

And with the economy still like it is along with the competition and wireless's place along with other things, it's difficult in today's environment.

We think once we've seen job growth -- we've seen the economy change.

What we're not seeing is job growth yet.

We think job growth will help drive more sustained demands for services and access line growth.

That's really important for us.

Right.

So, on the economy front you have seen some stabilization in terms of maybe no more layoffs, but you're not seeing job growth improve yet, meaningfully.

That's exactly what we're seeing.

It's kind of stabilized somewhat.

Just not a lot of job growth.

And a decent rule of thumb is that when the economy turns, there's maybe a six-month lag for access lines and telecom to start growing again.

Is that still kind of a fair assumption to use, or is that not as relevant today?

I think that's a pretty fair assumption.

I think there will be a lag there before we'll see the real growth come through our financials.

Okay.

And then just the last couple questions.

How much overlap now do you have with high speed data, and are you seeing that get incrementally more aggressive?

And I'm trying to remember where your DSL pricing is.

Maybe just mention that, too.

Okay.

Our overlap is still around 35% or so with cable modem.

And we've been first to market in most of those areas.

As far as our pricing is concerned, we're at $49.95 in most markets.

We have gone down in a couple of markets to the $39.95 level, but we've been able to sustain a higher level.

Over time we think to really drive the penetration we need and want, we'll have to have lower prices, as the Bell companies have already done.

We hope we don't have to go as low as some of them have gone.

But we think we'll have to see lower pricing to drive (inaudible) penetration.

Right.

What force is that?

Is it just high speed data getting more aggressive, or when you just realized you hit a point of inflection -- I think you said you're at what penetration now? 5%?

About 5.2%.

Is there a magic number there?

We haven't set a magic number.

We're watching demand and our continual growth.

We had a record quarter this time for us -- in DSL.

We'll continue to watch that.

It's a balancing act between your margins and customer growth, and we'll continue to watch that on almost a daily basis.

Great.

Okay.

Thank you.

Cannon, the other opportunity that we have, you know, more from a financial side as opposed to operations, is just to utilize the free cash flow that we throw off to continue to de-lever and to improve results that way.

Thank you.

Our next question is coming from Travis McCourt.

Please state your affiliation, then pose your question.

Thanks.

Morgan Keegan.

Good quarter, guys.

I wondered if you had any update on what's going on right now in terms of the USF fund, shoring that up?

You mentioned it a lot during your analyst conferences this summer.

And then, also, Stewart, I know strategically with all the bundling going on, I would imagine that finding a way to bundle video and wireless is probably somewhere in your thought process.

Is that something we should look for in 2004 in terms of a major strategic thrust, or is that something you feel you don't need for a few years?

Karen Puckett.

I'll take the USF first.

In terms of USF, a couple of activities that everyone is aware is going on.

And we're very involved in the ETC front.

We believe that the joint board will, probably by the end of the year, come back with recommendations on hopefully strengthening the rules for ETC and increasing the credentials that one needs to get those funds.

There could be some impact on, you know, what lines are USF-fundable or not.

There's been two hearings, one of which Glen Post participated on, on just over all USF (inaudible) and Burns.

We don't really -- we're around the table there.

We don't really expect any legislation this year.

We're still hopeful that one might squeeze through through the Burns, but we think it's highly unlikely.

So, net-net, at minimum, we believe that the joint board will come up with a ruling and a recommendation that the FCC will have to rule on here very quickly, within the next couple of quarters.

Travis, this is Glen.

Regarding the bundle and the video and wireless, first of all, we're working with wireless carriers to offer our customers a wireless alternative as parts of our bundle, and we are in discussion with them as we speak.

We hope to have that available by mid-year next year.

Of course, there's a lot of work to do between know and then, but that's our goal.

Regarding the video side, we're -- obviously, for us, the ultimate goal is fiber-to-home.

That's just not feasible today.

And we don't see that as a major thrust.

We're looking at all those opportunities.

It's just too expensive.

We also are trialing VDSL, video over copper, and we're getting a trial in La Crosse, Wisconsin this year.

We think there have been some developments there that make that more feasible, more attractive.

We continue to look at that.

We don't expect to have a wide rule out of that for the next 24 months, anyway.

And finally, we're talking about the DBS carriers, satellite broadcasters and satellite carriers, and discussing a similar deal with that SBC and BellSouth had worked out.

That is more attractive than it was in the past because -- that allow us, hopefully, to bill the customer and be the initial customer contact for service.

So, that's a positive for us.

So, we're in discussions with them.

And of course, timing, we're not sure about that.

Hopefully, we'll have something ready by mid-year next year to begin rollout in certain markets.

Great.

Let me just follow up with a quick CapEx question.

This year I would imagine you had some accelerated CapEx on some of the new acquired properties, and I think DSL is still a big -- in buildout phase this year.

As you look to next year, is that CapEx you intend to replace on other things, or where would you end up spending that money?

Would it just be generally moving fiber closer to the neighborhoods for cost reasons, or could we see a down CapEx trend after DSL is built out?

Well, in general, we're still deploying DSL in our Verizon markets, so we've got continual opportunity there for next year, that we believe there's good demographics and take rate potential as well as dial that didn't have it.

But, we are one of the key drivers that's continued to drive fiber closer to the premise, at least to the remote terminal.

But, in general, I would say that it would be even (inaudible) on the Telco side.

We are making investments and continue to expand on our Whitecorp acquisition, going after some interesting segments there, like the wireless aggregation traffic that's been very beneficial to us in the last couple of months.

Gotcha.

And one final one.

Karen, are you guys still adding dialup customers, or is that in decline now?

We are actually cannibalizing our dial customers moving into DSL.

In general from a year-to-date perspective, we're about flat.

But we're -- from a revenue perspective, you know, well beyond any of the RBACs in terms of revenue growth in any of that product.

It is a challenge product from the standpoint that many customers are going right into broadband when they buy a PC, and there's a lot of cannibalization, which is good cannibalization, from dial or DSL.

In fact, we look at a dial as a step into our broadband product.

Gotcha.

Thanks very much.

Thank you.

Our next question is coming from Greg Gorbatenko.

Please state your affiliation, then pose your question.

Loop Capital Markets.

Thanks.

Good numbers, guys.

My question is around long distance.

It continues to be declining somewhat sequentially, and what's behind that?

Then also, if you could just maybe speak to I think you said there's 35% overlap of cable competition.

I'm trying to figure out where the line losses are coming from.

Maybe you can touch on what percentage cable versus local business, you know, some Celik maybe, and then wireless substitution and then versus, like, job loss disconnects.

Thanks.

Greg, first of all, long distance, we've cycled through a year of the Verizon acquisition, so that's having impact on our long distance penetration growth.

In addition to that, it's just additional competition with MCI rolling out some price plans, you know, 5 cents a minute price plans.

It's impacted the whole industry.

And we'll see how this plays out.

We're seeing numbers -- I think we're seeing -- you know, it depends on how far we're willing to go with pricing, we're waiting -- the margin versus customer growth issue.

And we'll make some decisions there.

We certainly have outstanding margins in our long distance sector and some room to bring prices down there and drive growth, but we've not made any final decisions there.

But it's competition as well as cycling through the Verizon acquisition.

Regarding the loss of lines, we lost -- total competitive losses we think were only about 2,000 lines per quarter.

So, it's just not substantial losses for us to date, compared to what the other companies are seeing.

So, you know, if you combine wireless, cable and Celik losses, and we're just -- our markets, the rural markets, are just -- we're having less [inaudible].

We're really focused on customer service, we (inaudible) free up the competition, and we've been successful there.

Okay, thanks.

If I back out the $44.5 million from the Missouri lines, I get an organic growth around 5%.

Does that sound about right?

Greg, I'm not sure what you're doing.

I was looking at, kind of changing course here, looking at the revenue growth and I was trying to equalize it to get an organic number.

And I backed out the Missouri increase of 44.5 that you put in the press release, and I computed about 5% organic.

Is that about right?

On the -- just if you look at our -- just the telephone segment by itself, the local exchange business, the organic growth rate was about 1.2%.

Right.

But in total.

Total is about 3.3%.

Okay.

Good.

Thanks.

Thank you.

Our next question is coming from Adam Quinton.

Please state your question, then pose your question.

Hi, guys.

Adam Quinton from Merrill Lynch.

Two questions, one sort of specific, one very general.

A specific one on DSL.

If I understood your comments earlier, you're telling us that you've got about one and a half million access lines that are DSL-capable today out of your 2.4 million total.

So, below 60%.

Some of the bigger carriers are pushing that percent of DSL -- percent of lines that are DSL-capable up towards the 80% level, and I just wondered if you could comment on how much further you could expand the accessible markets, if you want to call it that, for DSL and over what time frame.

And a second question, I apologize if this sounds maybe a bit flip, but it's not meant to be.

When we talk about the economy, I guess all of us are grappling with a conundrum which is that in a previous announcement from the Commerce Department today, apparently the U.S. economy is growing very strongly.

I don't know whether you saw the Commerce Department said that GDP growth across the whole country was 7.2% in the third quarter, which, I don't know about you, but I find very difficult to correlate with what I see going on, at least in the telecom market.

There's a lot more money being spent in the economy through tax cuts or whatever.

It certainly doesn't appear that people are spending it on telecom services.

And I wonder if you could do your best to try and square that particular circle.

How can we be seeing such strong reported GDP growth, and yet in the telecom landscape, we don't seem to be experiencing much benefit of that?

Thanks.

Adam, first of all, on the DSL availability, we can certainly drive that further.

A couple issues.

First of all, there's an opportunity, from an opportunity standpoint, about 35% of our local loops are less than 18,000 feet in length, which theoretically we should be able to provide DSL service without substantial investments, at least without shortening the loops to those customers.

The question, you know, is what's the profitability of that.

We're operating in a lot of rural areas, and we take DSL as far as we think it's feasible.

We continue to look at the economic analysis, [inaudible] type analysis to expand that, and we'll continue to look at those opportunities.

But it's more the rural nature of our properties, whether -- how far we want to go and how far it's feasible to go with DSL availability, even though our loops, we could go to 8% with -- based on our loop links today.

Regarding the economy and the impact, we did see the new numbers, and we're pleased with that.

But what we're not seeing, at least in our markets is that improved economy turning turn into job growth.

And because of that, you know, we don't see a lot of growth and demand -- increasing demand for access lines and other services.

Once the economy kind of pushes the job growth, and I think we'll see an improvement in -- a more positive impact on our industry.

Also, I think there is a lag there.

If and when this improved economy that we're seeing thus far, I think there will be a lag before we see the impact on our sector, as is normally the case.

Okay.

Thanks.

And I think it would be fair to point out that, in our legacy markets, in DSL, we're 70% capable in terms of DSL.

So, we're still getting our growth in terms of next year.

Expansion will be in the Verizon and [inaudible] GT markets.

Thank you.

Our next question is coming from Karen Young.

Please state your affiliation, then pose your question.

Hi.

Good morning.

All State.

Let's see.

Could you tell us what the internal growth was for telephone and the total company last quarter, just so I can get an idea of trend?

And then, secondly, maybe you could just talk about if there's any seasonality in the third quarter versus the second quarter?

I had been assuming kind of a lower line loss, and I don't know if it's because of just off in the seasonality or -- I was just wondering why the access lines lost in the quarter accelerated from the second quarter.

Thank you.

Karen, one tid bit on the access line loss for the quarter.

We had a 4,500 access line change in second lines.

In the second quarter, we added 1,700 second lines as a result of a promotion that we had.

So, we actually had growth in second lines in the second quarter.

The third quarter we lost 2,800 second lines.

So, you know, you can -- one way to look at it, I guess, is of the 8,700 lines, there was really a 4,500 shift in what happened to second lines.

A little bit mother color behind that.

In terms of the 8,724 that we lost, we actually have businesses that had less of a decrease sequentially from second quarter to third quarter.

We lost about 1,300 business access lines in second quarter down to 686 in the third quarter.

The primary reason for the loss was in the residential.

The primary line was basically flat to up just a bit.

The true issue came in the second lines.

And as Stewart pointed out, we had a campaign in second quarter.

We cycled through our regulatory waivers that we used during those campaigns for installations.

But we are selling aggressively additional lines, which we don't count into the business segment.

And I believe that's what's helping our business lines right now.

Okay.

Thank you.

That's helpful.

And the internal growth rate in revenue in the Telco segment in the second quarter was 2.1% compared with the 1.2% in the third quarter.

The second quarter consolidated revenue growth rate was 5.1% compared with the 3.3% in third quarter.

The reason for the lower growth this quarter, do you attribute it to again some of those factors we just talked about?

Yeah, and I think to a certain extent it's cycling through on the Verizon properties in terms of the --

That's right.

-- you know, the selling of long distance services and other services in those markets.

Okay.

We didn't get quite as much lift maybe in the other segment in the third quarter as we did the second quarter.

Okay.

That's helpful.

Just one last question.

Deferred taxes, you know, it's helpful to your cash flow.

I think it was about $24 million this quarter.

Do you expect that to continue at a similar rate, I guess out into next year?

Yes, it probably will, Karen.

You know, one pretty material item that we have is that we get to amortize the franchise costs associated with the last two acquisitions that we did, the Verizon acquisition in 2002 and the GTE acquisition in 2000.

In other words, we get to amortize the franchise cost over a 15-year period for tax purposes, and we're not amortizing anything for GAAP anymore.

And that total amortization is about, if I remember right, it's about $100 million a year.

So, we get a $35 million cash flow benefit in effect for 15 years associated with the amortization of that franchise cost.

Additionally, you know, I think we have 30% bonus depreciation now.

So, that will help some, too.

So, probably we'd expect that to continue for the next year or two.

Okay.

Thank you very much.

Thank you.

Our next question is coming from Jeanette Baez.

Please state your affiliation, then pose your question.

Morgan Stanley.

Good morning.

Are you seeing any change in the market for a line acquisition, any interest from the potential sellers?

If you could just give us some color there.

And a more detailed question.

How should we think about margins in the other segment going forward given that long distance performed pretty well this quarter?

How should we look at that going forward?

Thanks.

Jeanette, first of all, on the acquisitions, there are a lot of rumors out there, and there are some -- we notice some smaller acquisition opportunities are being looked at.

Nothing major that we're looking at, at least immediately.

We think there will be some opportunities, but most of what we're hearing is rumors and we believe it makes sense for the -- you know, the Bell companies continue to sell rural lines over time, and we expect that to happen.

It's just it's a matter of timing and, of course, if they will decide to do that.

Regarding the margins in the other segment going forward, the LD margin is really strong this quarter.

I think there will be some pricing pressure there.

I think we could see some reductions there.

And the whole other segment, the margins are obviously lower than the Telco sector.

However, your investment requirements, your basic investment is much lower.

So, for your return on investment you don't have to have the margins that you do in the Telco sector.

So, it's not all bad.

Mainly we're looking at what the total growth is in our cash flows, and we've balanced that with -- you know, between margins and customer growth penetration issues and pricing, of course.

Thanks.

Thanks.

Our next question is coming from Grace Lee.

Please state your affiliation, then pose your question.

Sure.

Bear Stearns.

Most of my questions have been answered.

I just had one more on the acquisition of level 3 assets.

Is that still on track to close in fourth quarter?

And do you have any guidance you'd want to give us as far as what kind of contribution that would make in '04?

Grace, it is on track to close.

It will probably close the owned of November.

And we really can't give any guidance in terms of the impact that that will have on '04.

We'll try to have that for you when we give our '04 guidance at the ends of next quarter.

Okay.

But right now it does around one and a half million in revenue per month, is that about right?

That is -- Grace, that's pretty close to what it does.

But that includes the ref knew that they're billing CenturyTel.

Right.

Okay.

And -- yeah.

We have time for one more question.

There appear to be no further questions in the queue.

Do you have any closing comments that you would like to finish with, Mr. Post?

Yes.

Thank you.

CenturyTel continues to focus on driving solid financial results in what remains really a challenging economic and industry environment today.

We believe we have a -- that we have built a scaleable business model and will continue to look for opportunities to leverage operational capabilities, capabilities in our financial strength to grow our company.

We will continue to work to strengthen our customer relationships and drive revenue growth.

We're offering bundled and packaged service with special emphasis on the broadband services.

Finally, we believe our financial performance for the first nine months of '03 reflects our focused strategy of providing communication services to rural areas and smaller cities as well as the dedicated efforts of our employees.

And we appreciate your participation in our call today and we look forward to speaking with you in the days ahead.

Thank you.

Thank you, ladies and gentlemen.

This does conclude today's teleconference with CenturyTel.

You may disconnect your phone lines at this time, and have a great day.

Thank you for your participation.