Lumen Technologies Inc (LUMN) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CenturyTel first quarter earnings call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will follow at that time.

If anyone should require assistance during the conference, please press star, then 0 on your touchtone telephone.

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Tony Davis, Vice President, Investor Relations.

Mr. Davis, you may begin.

Thank you, Patty.

Good morning, everyone, and welcome to our call today to discuss CenturyTel's first quarter 2005 earnings results, released earlier this morning.

During today's call we will refer 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 our 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 today, particularly as they pertain to guidance for second quarter and full-year 2005, and other outlooks in our business.

So please 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.

Our call today will be accessible for telephone replay through May 4, 2005, and accessible for webcast replay through May 18, 2005.

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 April 28, 2005 and should be considered valid only as of April 28, 2005, regardless of the date listened to or reviewed.

With that, I'll turn the call over to your host today, Glen Post.

Glen?

Thank you, Tony.

We appreciate you joining us today as we review CenturyTel's first quarter 2005 operating performance.

CenturyTel again achieved solid financial performance during the first quarter, as revenues were -- were at the high end of our expectations for the quarter and diluted earnings per share exceeded the high end of our guidance.

Earnings per share, excluding nonrecurring items, was $0.59 for the quarter.

CenturyTel continued to achieve year-over-year revenue growth during the first quarter, even with expected declines in intrastate toll and USF revenues, as well as -- as a loss of access lines during the quarter, and there were a few primary drivers -- drivers of this growth which more than offset these anticipated declines.

First, we experienced decreased data revenues, primarily as a result of strong growth in DSL subscribers during the last 12 months.

We also continued to drive further long-distance penetration of our access line base.

Additionally, we achieved further penetration of our customer base with enhanced calling features, driven by the continued success of our bundled service offerings.

And finally, we continued to drive growth in our LightCore division, which is our regional fiber transport operations.

Customers continue to show strong demand for CenturyTel's Simple Choice bundles, as we added nearly 28,000 bundles during the quarter, an increase in total bundled customers of nearly 10% in the first three months of 2005, and that's sequential growth, over the fourth quarter.

Our bundled customers now represent over 17% of our residential access lines, up from 12.5% at the end of the first quarter of 2004.

Our customers also continue -- continue to show strong interest in CenturyTel's DSL offerings, as we added a record 31,000 DSL subscribe -- subscriber connections during the first quarter.

Additionally, customer demand -- customer demand for long-distance solutions remains strong, with the addition of more than 29,000 long-distance lines during the quarter.

Over the last 12 months we've increased our DSL customers served by 79%, and our long-distance lines served by more than 14%.

We also continued to achieve strong cash flows, as we generated over $137 million of free cash flow during the first quarter.

We continue to work to mitigate the impact of shares scheduled to be issued in May under our equity unit instruments.

Stewart will discuss this in more detail later in the call.

During the first quarter, CenturyTel continued to return cash to shareholders through -- through the repurchase of 1,780,000 common shares for approximately $60 million, and also we announced a 4.3% increase in the cash dividend on our common stock.

This represents the 32nd consecutive year that CenturyTel has increased its cash dividend on its common stock.

Before turning the call over to Stewart for additional detail on the financial results for the quarter, I want to provide you a few operational updates.

First, a brief overview of CenturyTel -- of our CenturyTel/DISH co-branded satellite television service offering.

As you will recall, we soft-launched satellite television service in two markets late in the fourth quarter.

During the first quarter, we expanded the soft launch to a substantially larger footprint to continue to -- to test our service delivery model on a larger scale.

Initial custom -- customer demand during this soft launch was encouraging, and we expect to commercially launch this service during late second quarter and early third quarter across a significant portion of CenturyTel's service footprint.

With regard to our CenturyTel branded wireless service initiative, as we previously discussed with you, we initiated a limited employee and friends trial of our wireless service in two markets during the fourth quarter of -- of 2004.

While our experience in one of those markets actually exceeded our expectations, we encountered some coverage issues in the other market which -- which led to us discontinue that friendly trial in that market during the first quarter.

We continue to examine alternative -- alternatives for providing good coverage throughout our service areas in these rural areas and smaller cities.

We expect to commercial launch our CenturyTel wireless service in the successful trial market during the second quarter, and we will continue to plan for a further commercial launch of wireless as part of our bundle in the coming months.

Our switched digital video trial in Lacrosse, Wisconsin, continues to proceed well.

We have successfully addressed content providers' issues regarding protection of the content, and we continue to work with vendors to improve the economic -- economics of the service offerings.

We expect to launch commercial service in at least one market later this year, and we expect to gain key learnings through that launch which should help us with future expansion of the service.

We believe the increased interest in switched digital video by some of our larger peers should help drive the scale necessary to improve the economics of this service.

We continue to believe that there is strong potential for switched digital video as an entertainment solution for the more dense markets that CenturyTel serves.

We have not set a definite timetable for our broad commercial launch of switched digital video, but we will keep you updated with this -- with our plans there in the months ahead.

Finally we continue to work towards closing the previously announced acquisition of the KMC metro fiber assets around mid-year.

We expect to integrate 12 of the 16 markets in our LightCore fiber network for an investment of around $12 million.

We continue to believe this acquisition further advances our goal of becoming a leading provider of fiber transport services to rural areas and smaller cities in states in which CenturyTel operates, and it -- and it enhances our efforts to grow and diversify our revenue streams.

At this time, I'll turn the call over to Stewart to provide additional detail on our results for the first quarter and to provide updates on our financial guidance for the second quarter and full-year 2005.

Stewart?

Thank you, Glen.

During the next few minutes I will review the highlights of our operating results for the first quarter of this year, provide a few comments regarding our capital structure and liquidity, and then conclude my remarks today with a brief discussion of the guidance provided in our earnings release issued this morning.

For first quarter 2005, operating revenues, excluding nonrecurring items, increased to $595.3 million, up from $593.7 million in first quarter of 2004.

Local services revenues for the first quarter of 2005 were $177 million, in line with first quarter 2004, as revenue growth from the increased penetration of enhanced calling features offset revenue declines associated with access line losses.

Access lines declined 15,100 during the quarter, and we ended the quarter with approximately 2.3 million access lines.

Network access revenues were $230.3 million, versus $241 million in first quarter of 2004.

This $10.7 million decline resulted primarily from the anticipated lower universal service funding and intrastate revenues.

Long-distance revenues were $47.5 million, versus $44.6 million in first quarter of 2004, a 6.6% increase, driven primarily by higher minutes of use related to subscriber growth, which was partially offset by lower average rates.

Data revenues increased 11.1%, from 660 -- from 65.6 million in first quarter of 2004 to 72.9 million in the first quarter of 2005.

This was primarily driven by continued strong DSL subscriber growth and data circuit additions.

Fiber transport and CLEC revenues increased 16.1% to $20.2 million for the quarter -- for the first quarter of 2005, versus 17.4 million in first quarter of 2004, primarily due to growth in the wholesale segment of the business.

Our operating expenses increased $8.3 million, driven primarily by increased costs related to the growth in our DSL subscriber base and in our LightCore business and higher depreciation expense, that were partially offset by lower bad debt expense.

Our operating cash flow for the first quarter of 2005 was $309 million, compared with $310.5 million in the first quarter of 2004.

And for the first quarter of 2005, we generated an operating cash flow margin of 51.9%, as compared to 52.3% in the first quarter of 2004.

Operating income for the first quarter of 2005 was 176.9 million, and net income was $80 million.

We added approximately 29,400 long-distance lines during the first quarter, bringing the total long-distance lines to a little more than 1,097,000 as of the end of the quarter.

The long-distance line penetration in our local exchanges as a percentage of total access lines reached 47.7% at the end of the first quarter of 2005, versus 40.6% at the end of the first quarter of last year.

We continue to experience excellent customer response to our DSL offerings, with the addition of a record 31,200 DSL subscribers during the quarter.

We ended the first quarter of 2005 with nearly 173,800 DSL subscribers, or a 10.5% penetration rate of total DSL-enabled lines.

From a capital structure and a financial strength perspective, CenturyTel continues to be positioned well, and we are also in excellent shape from a liquidity standpoint.

We began 2005 with approximately $167 million in cash and cash equivalents, and generated over $137 million of free cash flow during the first quarter.

We invested $74.9 million in capital expenditures during the first quarter, and also invested approximately $60 million during the quarter to repurchase 1.78 million shares of common stock, which represents completion of about 30% of the $200 million share repurchase program announced in early February of this year.

In February we successfully remarketed the notes associated with the $500 million of equity units.

As part of the remarketing we issued $350 million of 5% ten-year notes.

We used the proceeds from this offering, together with $50 million of cash on hand, to retire $400 million of the notes associated with the equity units.

Approximately $100 million of the remarketable notes remain outstanding, with a 2.25 year maturity and a 4.628 coupon.

CenturyTel's net debt did not change as a result of these transactions; however, total debt outstanding declined by $50 million.

Additionally, we repaid an additional $109.3 million in debt during the quarter, and ended the quarter with more than $129 million in cash and cash equivalents.

As of the end of the quarter, CenturyTel's debt-to-equity ratio was .83 to 1, and net debt to annualized operating cash flow for the quarter was 2.19 times.

We continue -- we expect to continue to maintain our ratios in a range that should enable the Company to maintain its investment-grade credit ratings.

So CenturyTel is financially strong and continues to generate strong cash flows.

Therefore, we believe we're well positioned, from a liquidity and flexibility standpoint, to execute our growth and investment strategies in the future.

Finally, I would like to briefly discuss the second quarter and full-year 2005 guidance provided in our press release this morning.

Let me begin by reminding you that our guidance excludes nonrecurring items.

Additionally, our guidance does not include the impacts of any share repurchases that may be made during the remainder of the year under our $200 million share repurchase program, or any impact related to the pending KMC metro fiber asset acquisition.

Finally, the purchase contract component of our equity units is scheduled to settle on May 16.

Under the equity units, we will be required to issue between .6944 and .8741 shares of common stock for each share -- for each equity unit outstanding, depending upon the 20-day average share price ending May 11.

As discussed on prior calls, we have identified various alternatives for mitigating the dilutive effect of the shares to be issued under the equity units, and we believe we will be successful in accomplishing that result.

We will provide more detailed information regarding these efforts as our plans are more fully finalized.

Our 2005 guidance does not currently include any costs associated with these mitigation efforts, but it does assume that the mitigation efforts will be successful.

Now, to review our guidance.

For second quarter 2005 we anticipate total revenues to be in a range of $590 million to $605 million, and diluted earnings per share to be in the range of $0.53 to $0.57.

A note regarding our expectations for second quarter.

We expect increased operating costs related to three items: expected growth in our long-distance, Internet and fiber businesses; annual wage adjustments that were effective in April of this year; and increased outside maintenance activities due to warmer weather, i.e., just seasonality.

We've also narrowed our 2005 full-year diluted earnings per share guidance from $2.20 to $2.35, to $2.25 to $2.35.

So we increased the bottom end of our guidance by a nickel for the year.

The primary reasons behind this adjustment are the better-than-expected first quarter results, share repurchases made during the first quarter, and the SEC's decision to postpone the effective date for the change in accounting for stock options.

This concludes our prepared remarks.

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

Thank you.

Thank you.

If you have a question at this time, please press the 1 key on your touchtone telephone.

If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

And if you are using a speakerphone, please lift the handset.

One moment, please.

Our first question comes from Daniel Henriques of Goldman Sachs.

Hi.

Good morning.

I have two questions, the first one about DSL.

Can you talk a little bit about some of the promotional and pricing initiatives that led to this strong performance this quarter in terms of net adds, and what should we expect going forward?

And when you talk about pricing, could you help us understand your -- your data revenues were kind of flat sequentially, despite the net adds.

Was there -- is that because of DSL pricing potentially going down -- excuse me -- or is it because of some non-DSL data revenues being not as strong as last quarter?

And -- and the second question is, could you update us in terms of VoIP launches in your territory, if you just -- what you expect in terms of VoIP competition, any areas that overlap with like Time Warner or Charter or Cox?

And that's it.

Thank you.

Okay, Daniel, I'll start and let Karen add to this.

The one thing we did starting the fourth quarter, we -- we began not charging for the modems, which was a plus, and then we also last year began the tiering of our DSL and then -- and folded into our bundles.

We have some favorable pricing in the bundles.

Karen, you can follow up on that in a moment.

As far as the data revenue increase, DSL pricing is down from about $7 per month per -- per customer from a year ago.

That's -- that is a little bit odd, because we had really strong adds the last two quarters.

Part of that decrease is coming from the private line section of our data revenue, where we had a couple of prior-period adjustments in the fourth quarter that we didn't have in the first quarter, if you're looking at that the [inaudible] -- the growth in -- in the data revenue section.

Also, the free modems impacted the actual data growth in the RPU for us there, so that -- both of those items impacted the -- the data revenue growth to some degree.

Karen, you want to talk about the -- the price a little more?

Yes, a couple of things that I -- that we think -- believe that we did implement the pricing that Glen talked about, and essentially the pricing in the bundle is -- DSL you can get for $30 at the 768 speed.

There is the same promotion that we've had for quite some time.

For the first three months, regardless of which plan you take, you -- DSL is $20, and it moves to the appropriate tier that you chose, if it's the $30 or the $40 rate plan.

Secondly, we enabled quite a few lines in fourth quarter, about 122,000 additional lines, a lot of it in our Alabama, Verizon and Missouri properties, and so that gave us some good growth opportunities going into the first quarter.

And then also in first quarter, we did do a campaign directly to our dial customers, migrating them to DSL for a 24.95 price point, so it was less of a step-up, and there was a lot of interest moving dials to -- to DSL.

And the final question, Daniel, on the VoIP launches, voice over IP, we have had no cable companies launch voice over IP in any of our territories to date, so we have not -- we don't have any real voice over IP, other than just the -- the Vonage-type offerings in some of our -- some of our markets.

If -- if you -- okay, a follow-up on that.

If you add Time Warner, Charter, and Cox, I believe those are the three largest ones that overlap with you, is that fair to say that it's probably around 30, 35% of your lines?

And -- and do you -- did you hear anything about when they may be launching VoIP, any of those three companies?

Charter overlap is -- the increase in the DSL -- excuse me, cable modem competition was very little from fourth quarter to first quarter.

It went from 49.3 to basically 50%, 49.9%.

The main increase was in the Charter markets.

Charter today, in terms of that cable modem overlap, is about 25%.

Comcast is 7.8 and Time Warner is 7.4, so as you can see, there's not a -- there's not a huge overlap with Comcast and Time Warner, but they're about the same.

Okay, thank you.

Now, as far as proposed rollouts of voice over IP, we -- we hear a lot of rumors, and our local management people and marketing people are -- are continually watching that, but no one is -- we have a few markets where they're saying they will be rolling out in the next few months, but we have not seen anything happen yet.

Okay, thank you.

Okay.

Our next question comes from Chris King of Legg Mason.

Good morning.

Just quick question for you, to follow up regarding access line trends going forward.

You guys had been guiding towards something in the 2.5 to 3.5% access line decline range.

Would that number theoretically possibly increase, or would we be headed toward, the I guess the lower end of that -- of that decline if DSL adds continue to show the strong growth that they did in the first quarter?

Chris, the DSL growth certainly impacts the second line.

The -- we still feel comfortable -- comfortable for this year in that -- that range.

We're not sure -- we -- we were at 2.9% for the quarter, and could it go a little above that with ADSL.

We see -- sometimes you see the DSL lines go away a few weeks or months after the DSL sales, so we could see a little higher, but we feel comfort -- comfortable with the range we've given.

Do you have any rough idea of -- of -- of how -- how many -- how much of your access line decline in the quarter was directly attributable to the DSL adds?

It's difficult.

We have some ideas, but nothing we're ready to throw out there.

We know that some of the -- some of that decline was definitely DSL-related, but we're not sure how much.

Thanks.

Our next question comes from David Janazzo of CIBC World Markets.

I know you comment on this all the time, but in terms of the acquisition landscape, is anything changing?

How do you see it developing?

And just in general, your -- your current thoughts?

Dave, we -- we've seen nothing tangible the last few months.

There are a lot of rumors out there, as usual.

I believe that we will see opportunities out there.

Hopefully the -- we'll see them at prices that will enable companies like CenturyTel to drive value for shareholders in the current environment, but there's nothing tangible on -- on the table today.

I do believe that we'll see the Bell companies reconsidering selling -- or considering selling rural lines in the future.

Thank you.

Our next question comes from Frank Louthan of Raymond James.

Good morning.

Okay, just a couple -- a little bit more on DSL.

I've seen a -- some very positive trends sort of across the sector and I just want to get your take on where -- where you're seeing the demand coming from.

Obviously, you've had some promotional activity, in particular the -- the dialup promotion sounds very creative, but are you seeing a -- a change in -- an -- an increase in demand from the consumer, or is it more of a -- your -- your promotional activity and pricing, or is it a combination?

And give me an -- an idea of where that is.

And then just sort of a housekeeping question, where are you guys as far -- for -- for the year in your annual guidance?

You just -- you -- earlier you had stated that there's some dilution from satellite and wireless.

Where are you as -- as far as -- how much did that expense you've incurred so far?

Thanks.

Frank, on the DSL, I think the free modem certainly made a difference in demand.

It was just a -- that price point for the modem seemed to be a -- somewhat of a barrier.

I think there's increasing knowledge of high-speed Internet and I think it's -- throughout our -- our communities we're seeing a lot of more awareness, and I think the general demand is up, so I think it's a combination of those things.

Annual guidance, Stewart, you want -- ?

Karen, you want to add anything to that?

No.

In terms of your question around consume -- I mean, definitely consumer and business is growing on the demand side.

I agree with Glen.

It's -- clearly free modem was a good key.

A lot of the cable guys were already offering free CP, and it put us with parity.

And we believe we have a superior product, and we think it's price point.

And -- and, Frank, we still expect the same dilution that we talked about earlier last quarter, which is about $0.04 to $0.07 a share.

We only had about probably less than a half million dollars, a little less than a half millions of -- of loss associated with those initiatives during the first quarter.

Okay, great.

And any update on intercarrier compensation discussions on the Hill?

On intercarrier comp the -- the actual comments are due in to the SEC on May 23, so that's what we're gearing up, and think that's where everybody is focused right now.

Okay, great.

Thank you.

Our next question comes from Jonathan Chaplin of JPMorgan.

Good morning.

Thank you.

I just had a -- a couple of quick questions, firstly on free cash flow.

Could you give us some feel for where you're expecting to come out for the year?

You -- you had a great result on the free cash flow front this quarter.

It seems a -- a couple of benefits were on the -- on the deferred tax side, and then from working cap.

And if -- ideally it would be great if we could get an idea of where you're expecting free cash flow to be totally, but if -- if not, if you could just give us an idea of what you're expecting from a working cap perspective over the full year, and then from a -- from a deferred tax benefit?

And then the -- the second question I had was on the DSL front, if you have any idea what your flow share is, relative to cable, in the quarter, if your -- And then finally, on the acquisition front, is -- is there a -- a -- a leverage limit that you won't go beyond in order to acquire access lines?

Or I guess said another way, is there -- what is the upper limit for the number of access lines that you think you could purchase in -- in one go if they came on to the market?

Thanks.

Okay, first I guess on -- on free cash flow, we -- we don't give a projection of free cash flow for the full year.

I can tell you that -- and -- and we -- nor do we include deferred taxes in our free cash flow, either.

Basically, our free cash flow is -- is net income plus depreciation and amortization, less capital expenditures.

So that's -- that's how we define it.

So we do get a benefit from deferred taxes, but we don't include in that our free cash flow.

In terms of changes in working capital, we would expect that to really stay about the same during the year and not really impact it too much either -- either way, positively or negatively.

I might add that at the first -- first of the year we talked about our capital expenditure budget for 2005 being about $400 million.

We think now we will be closer to $425 million.

About $15 million of that is -- is due to the -- the increase in DSL customers that we've had, and the fact that -- that we need to basically be able to provide service to -- to more customers and enable our -- our DSLAMs more.

And then the other $10 million is primarily related to the LightCore business and the KMC acquisition.

Regarding the market share in DSL, we're not sure, but we feel like in most of our markets we have an advantage over the cable company, because we've been first to market in -- in most of those markets -- in most of those areas and we just -- with the demand we've seen -- we've seen the last couple of quarters, we think we have an advantage.

We have -- since this latest increase we -- we have conducted -- are conducting a study of that market share in the coming quarters, as a matter of fact.

As far as acquisitions, they're a leveraged limit.

We want to remain investment-grade credit rating, so that's -- that's our limit.

We're not going to go -- we don't -- don't want to go be -- below a investment-grade rating.

How many lines could we go out and acquire today in a -- on a cash debt-type transaction?

Maybe a million lines or so.

It depends on the cash flows of the -- of the -- of the companies we'd be acquiring basically, but we think in around a million you could add a couple hundred thousand of that maybe, depending on the cash flows.

Thanks very much.

Our next question comes from Tom Seitz of Lehman Brothers.

Yes, good morning.

Kind of a high-level series of questions.

Most of the other -- most of the other RLECs have opted for more of an agency model than a reseller model on satellite TV partnerships.

Can you talk about what you perceive are the benefits that you gain from the arrangement that you've structured that warrant the dilution that you're seeing?

And then sort of a related question, some of your more tiny brethren are seeing some pretty remarkable success with respect to DSL 2-Plus.

Probably that has a lot to do with who they're competing against, but hypothetically if DSL 2-Plus does take off, under your satellite contracts can you migrate these customers to your own network, if that makes sense financially?

And then I guess the last question is, who are you using for your set-top box at this point in the Lacrosse test?

Okay, Tom.

First of all, the -- as far as the structure of our relationship -- reseller relationship with satellite television companies versus the agency arrangement, the reason we wanted that structure, it gives us really a control of the customer.

We didn't want to be just -- be in an agency agreement where we're just reselling service.

We've seen some issues with that in the past, and we felt like we -- we wanted to provision the service, we wanted to be able to -- to take the trouble calls, the whole -- have complete and -- and -- and bill it on our bill as a CenturyTel service.

So that's the reason we went that direction.

We think from a customer retention standpoint and a customer satisfaction standpoint, it's the best alternative for us.

The -- as far as the migration possibilities, we have -- we cannot go out and really market to our DISH customers to take them to switched digital video if we -- if we change.

However, we can have -- we're don't -- we are not -- don't have exclusive relationships with DISH there, so we can -- where we have DISH customers, we can go in and initiate the switched digital coverage, we can -- we can stop our marketing of the DISH product, and those customers, if they migrate over, we -- they can migrate to us, and we just cannot go out and specifically market to them to take them away from the -- from the DISH -- from the DISH customer base.

Okay.

And then, just out of curiosity, are you disclosing who you use for your set-top box at this point?

Yes, we can tell you.

Right now we're using i3 Micros for the set-top box, and we're looking at other alternatives as well.

I know SBC is, I think, trialing Motorola and RCA/Thomson for their testing, so I think we'll be -- we'll be looking at other alternatives.

Okay, great.

Thanks a lot.

Okay.

Our next question comes from Edward Yang of CIBC World Markets.

Thank you.

My question is on your fiber business.

It's a small part of your overall revenue now, but the growth has been impressive.

How big do you think this business can grow, and could you also talk on the underlying EBITDA margins and CapEx requirements for this business?

Because it does seem like a somewhat unique asset versus the urban transport asset, and I'd like to just get a better feel for the economics of the business.

Thank you.

As far as how big it can grow, I -- I don't want to go there.

I think it's -- it's -- a lot depends on -- on that.

We could -- there's certainly a good growth potential in this market.

We've -- we've taken a very disciplined approach, as we did with all our acquisitions, in acquiring a distressed asset, have built a very strong and a -- and a dense network in the states in which we operate.

And the advantage of being in the rural areas, the smaller cities and carrying that traffic out to the mid-size cities is, we think, a good strategy, especially on the wholesale side, and also where we can gain POPs like we will, points of presence, on-and-off ramps in these mid-size cities with our KMC acquisition.

The -- as far as the EBITDA margins, I think we can see 50%-range margins over time, 45 to 50%-range margins are -- are -- are doable in this -- with this business.

CapEx, we do CapEx really based on a discounted cash flow analysis on every -- every build, whether it's a -- just a -- a small, linear buildout to a customer or to -- on our --on our major rings.

They're all this kind of cash flow-type analysis, and it's -- it's -- so far it's a good business for us.

We're showing good growth, and we have confidence we can continue to grow this business in these types market -- in these types of markets.

We don't have any desire to go into the long-haul -- enter major city-type transport areas.

And, Glen, if I could follow up on the CapEx issue again, I mean, what -- what's the average in -- in terms of -- as -- as a percentage of revenue?

Is it less capital intensive than -- than local, or -- or more?

And do you see -- do you see some additional acquisition opportunities in this space?

It -- it's less intensive for sure, less capital intensive.

As -- as a percentage of revenue, I'd be afraid to just -- just throw out a percentage right now.

We -- we -- we are -- it's really based on -- on customer growth and -- and -- and revenue driven.

It's more how -- it's how we're looking at the business right now.

The -- the last question?

Do you see some prospects for some more deals in this space?

Oh, yes.

The -- there's nothing out there major.

There -- there certainly is some possibilities we're looking at.

They aren't -- there aren't just a lot of companies out there who serve these rural and smaller markets, so we're -- we're looking at every opportunity that is in our -- in these states we're in and around these states we're in, but there -- there's just not a lot of fiber in there, and that's why it's a pretty good business.

Thank you.

Once again, if you have a question, please press the 1 key on your touchtone telephone.

We'll pause one moment.

Our next question comes from Simon Flannery of Morgan Stanley.

Thank you.

Good morning.

If I can come back to the wireless discussion that we had earlier, you talked about some coverage issues.

Is -- is that sort of particular to the carrier that you're dealing with, or do you think it may be a case of where there just isn't a suitable alternative and that this is -- how -- how -- how do you think you might be able to resolve this?

It -- the sense -- I get the sense that you're sort of reevaluating on some level, so what are your options from here on the wireless?

And coming back to the video rollout as well, you -- you've got a couple of different irons in the fire, the switched digital video, the satellite.

Can you give us a sort of a sense at the 30,000-foot level of three, five years from now, how -- how would you see your video subscribers?

Would you say it's sort of predominantly satellite, 50/50, or do you -- do you see switched digital video gradually taking over?

Thanks.

Yes, Simon, on the coverage issue, it -- it -- we think primarily it's carrier-related.

You're not going to have as good a coverage in rural America, of course, as you do in urban areas, but it's primarily carrier-related, we believe, in -- in -- in the issues that we -- we're dealing with right now.

And can you back out of the contracts you signed or -- and go with another carrier, or --?

Yes, we -- option -- we have options to do other things, so we're -- yes, we're -- we're looking at other -- other alternatives, though.

Good.

Okay.

And on the switched digital versus satellite, it -- it's difficult to say at this point.

Long term, the margins are better for us with switched digital, especially if the costs come down for the set-top boxes and -- and the other electronics there, as we expect them to.

We -- we prefer to be -- have more switched digital video.

However, a lot of our markets just aren't dense enough to allow that, so a percentage, I'd be afraid to say.

We'd like to see it in 40, 50% switched digital eventually in a five -- five-year time, but it's -- that's hard to say with -- with the pricing.

We still don't have the -- the pricing where we need it to be.

Okay.

Thank you.

Once again, if you have a question, please press the 1 key on your touchtone phone.

Our next question comes from David Barden of Banc of America Securities.

Hi, guys.

Thanks a lot.

I just wanted to follow up on maybe two -- two quick things.

One was on the long-distance revenue.

You guys had mentioned -- obviously driven up by the subscriber numbers, tempered by pricing.

I was wondering if you could maybe break out the -- the relative magnitudes of the -- of the pricing impact per minute versus the -- the actual usage slippage by customer, just so we can get a -- get a sense of which is the dominant force there?

And then second, if -- if -- if there's any different or shifting trends within the business side of the -- the line equation here, have you been seeing some tick-up with the economy, some incremental tick-down with just the natural erosion of the base?

Any kind of comments on that kind of relative mix shift would be great.

Thanks.

Yes, David, we had a -- about a -- over a 10% increase in our minutes, so that drove about a $4.5 million increase, and then that was offset by the decrease in the average rate per minute.

Okay, I can do the math on that one.

Thanks.

On the -- the access -- access question, what was your specific question?

The shift?

Sorry.

Well, no, just more on the -- the business line trend as a contributor to the overall trends in -- in -- in total line movement.

I was just trying to get a sense of -- are business lines getting a little better with the economic lift we've seen year-over-year, or is there some other trend that's kind of keeping business in lock-step with -- with consumer?

I'm just trying to get a sense of any kind of variation in trends.

Essentially, when you look year-over-year at business, our business activity inwards were -- were down, so -- and output improved, so it's -- it's -- year-over-year for first quarter it was an inward issue, as well as on the primary side.

Demand.

Right.

Okay.

Perfect.

Thanks.

But overall business, if you look at it for the last 12 months or so, I mean, it's been very flat.

It's been better than residential as far as the net -- net churn -- net change.

Right.

And what percentage of -- of the lines are business, again?

About 25 -- 25%.

Okay.

It's been holding in there.

All right.

Perfect.

Thank you very much.

Once again, if you have a question, please press the 1 key.

Our next question comes from Michael McCormack of Bear Stearns.

Hi, guys.

Just a couple quick ones.

First on the video, the switched video, when you talk about driving scale economics, is this something we can look at and say if -- if an RBOC, for example, gets it up and running, that you will lag them by some period of time before it becomes a viable product, or just give us a sense for that?

And secondly, in -- in the context of access line losses, is there anything we can read into potential impact of USF funding for '06?

I know it's a little early, but maybe just directionally where we should be looking at that.

Thanks.

Okay, Michael, the switched digital video, as far as lagging the RBOC, I don't think we're going -- right now we're -- we're up there with them, as far as where we are with trialing and -- and understanding the product, we believe.

However, the -- the real economics that they're going to drive is what we need to -- to really expand, so they're certainly -- they're going to have to make the decisions, more than likely, before we'll be ready to -- to roll out on a mass-scale basis for CenturyTel.

So the -- I think their being in the business, making some decisions and -- and getting started will be a catalyst for us.

We may lag them a little bit, but we're -- we're not going to be way -- a long ways behind the RBOCs, because they are -- they are -- we're -- we're ready with this and really understand the business pretty well at this point.

And from the standpoint of universal service for 2006, we don't really have any numbers right now, but would expect there to continue to be some pressure on universal service.

Okay.

Thanks.

And if you have a question, please press the 1 key on your touchtone telephone.

Our next question comes from Philip Olsen of UBS.

Just in -- in terms of the options that you're looking at to offset the dilution from the equity units, can you just maybe expand a little to kind of give a sense of what that range of options would be?

Is it something as simple as just going into the market and repurchasing a -- a similar number of shares as those would be issued as part of the equity units, or would you look to proact -- or preempt the issuance of those shares through some or -- other type of transaction?

Yes, Philip, certainly that's an option, and we will -- I think we'll be deciding more in the next few weeks, next two or three weeks, in terms of -- of what we're going to do there, but we have been exploring alternative -- different alternatives, and we do feel comfortable that we will -- we'll have a solution to be able to mitigate the dilution.

Okay.

Thank you.

This concludes our question-and-answer session.

I would like to turn the program back to Mr. Glen Post for any further remarks.

Thank you.

In closing, CenturyTel, we believe, achieved solid financial results in the first quarter, and we continue to meet the needs of our customers through our bundled solutions.

We experienced strong demand for our products, as reflected by the record number of DSL additions during the quarter, as well as a solid increase in our long-distance lines served.

We look forward to the expansion of our LightCore network with the completion of the KMC metro fiber asset acquisition, and integration of those markets into our LightCore group system, and we believe these assets will provide additional revenue growth and operating efficiencies over time.

We do remain focused on being the primary provider of broadband connectivity and advanced communication solutions to our customers in our markets, and we will -- we'll be diligent in our efforts to determine the best ways to utilize our free cash flow to deliver value for our shareholders in the months ahead.

Thank you again for participate -- participating in our call today, and we look forward to speaking with you in the months ahead.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may all disconnect.

Everyone have a great day.