Lumen Technologies Inc (LUMN) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CenturyTel second quarter 2005 earnings conference call.

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

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

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

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

Sir, you may begin.

Thank you.

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

During today's call we'll refer to certain non-GAAP financial measures.

We've reconciled these measures to GAAP figures in our earnings release which is available on our web site 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'll be making certain forward-looking statements today, particularly as they pertain to guidance for third quarter and full year 2005 and other outlooks in our business.

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 August 3, 2005 and accessible for webcast replay through August 17, 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 July 28, 2005 and should be considered valid only as of that date, regardless of the date listened to or reviewed.

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

Glen?

Thank you, Tony.

Thank you all for joining our call today as we review CenturyTel's second quarter 2005 operating performance.

CenturyTel again achieved solid financial performance during the second quarter as revenues and earnings per share both exceeded our expectations.

Earnings per share was $0.64 for the quarter or $0.07 ahead of First Call consensus estimates of $0.57, primarily due to lower than anticipated expenses and higher than anticipated prior period adjustments related to network access revenues.

CenturyTel continues to achieve year-over-year revenue growth during the second quarter in spite of an anticipated revenue decline of $11 million related to lower high costs, loop support, lower intrastate and interstate access revenue, and revenue declines related to access line losses.

This increase was primarily driven by increased data revenues driven by strong growth in DSL subscribers during the last 12 months.

Additionally, we continue to drive solid growth from customers utilizing our light core regional fiber transport network and we continue to increase our penetration of enhanced calling features.

Our bundling strategy continues to help drive revenue growth as bundled customers now represent nearly 18% of our residential access lines up from 13.5% at the end of the second quarter of 2004.

Our customers continue to show strong interest in CenturyTel's DSL offering as we added 21,000 DSL customers during the second quarter compared with 11,700 in the second quarter of 2004.

Additionally, strong demand for long distance solutions remains strong with addition of more than 25,000 long distance lines during the quarter.

During the past 12 months, we increased our DSL customers served by over 79% and our long distance lines served by more than 10.5%.

Consistent with past quarters, cash flows remain strong as we generated over $113 million of free cash flow during the second quarter.

We also purchased nearly 1.75 million common shares during the quarter for approximately $54 million under our $200 million share repurchase program.

Coupled with the 1.78 million shares repurchased during the first quarter, we've repurchased more than 3.5 million shares now during the first half of 2005 for a little over $114 million at an average price of $32.33 per share.

Through June 30th, we completed 57% of the $200 million share repurchase program.

We will expect to complete this program once accelerated share repurchase agreements, or ASRs, are completed that we've talked with you about previously.

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

First, we continue to make good progress on our co-branded CenturyTel dish satellite television service offering initiative.

During the second quarter we began offering DBS across selected markets and are ow offering satellite television service to approximately 850,000 households.

We're pleased with the very early results of the expansion of this service.

We look forward to including this product in our bundled plans in the third quarter as we begin expanded product promotional efforts.

Next with regard to our CenturyTel's branded wireless service initiative, we recently executed an agreement with one wireless carrier and we expect to launch wireless service in selected markets later this year.

We also continue to have discussions and negotiations with other carriers which we expect to complete over the next few months that should help ensure good wireless coverage in our various markets across the country.

Additionally, our switch digital video trial all across Wisconsin continues to progress well.

We've completed testing our business processes to ensure we're ready to manage the product operationally.

We continue to work with other outlets to bring economy to scale from the vendors.

We remain optimistic regarding the potential for switched digital video and still plan a soft launch of the service in a portion of the Lacrosse market later this year.

Finally, on June 30th, we completed the acquisition of metro fiber networks in 16 markets from KMC.

This acquisition helps expand CenturyTel's competitive local exchange carrier operations and advances our strategic goal of growing and diversifying our revenue streams.

It also enhances our position as a leading fiber transport provider near our existing markets.

We look forward to delivering a full array of advanced communication service to our new business customers in these markets in the months ahead.

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

Thank you, Glen.

During the next few minutes, I'll review the highlights of our operating results for the second quarter of 2005, provide a few comments regarding our capital structure and liquidity and then conclude my comments with a brief discussion of the guidance provided in our earnings release issued this morning.

For second quarter 2005 operating revenues increased to $606.4 million, up from $603.6 million in the second quarter of 2004.

Local services revenues for the second quarter of 2005 were 177.3 million compared to 180.1 million in the second quarter of last year as the revenue decline associated with access line losses more than offset revenue growth from the increased penetration of enhanced calling features.

Access lines declined 25,200 during the quarter and we ended the quarter with approximately 2,273,000 access lines.

Network access revenues were 239.4 million versus 245.5 million in the second quarter of 2004.

The $6.1 million decline resulted primarily from the anticipated lower interstate and intrastate access revenues.

Long distance revenues were 44.4 million versus 45.7 million in second quarter of 2004.

This 2.8% decrease was driven by $3.8 million true up of our revenue accruals.

Excluding this adjustment, normalized long distance revenues for the second quarter were $48.2 million or a 5.5% increase over the second quarter of 2004.

Data revenues increased 11.6% from 68.2 million in second quarter of 2004 to $76 million in the second quarter of 2005, primarily driven by continued strong DSL subscriber growth and data circuit additions.

Fiber transport and CLEC revenues increased to 18.1% to $21.6 million dollars in second quarter of 2005 versus $18.3 million in second quarter of last year, primarily due to growth in the wholesale segment of the fiber transport business.

Our operating expenses increased $6.9 million, driven primarily by increased costs related to the growth in our DSL subscriber base and increases in access expense and employee-related expenses that were partially offset by lower operating taxes.

Operating cash flow for the second quarter of 2005 was 316.3 million compared to 320.7 million in the second quarter of 2004.

And for the second quarter of 2005, we generated an operating cash flow margin of 52.2%, which is down slightly from the 53.1% reported in the second quarter of last year.

Our operating income for the second quarter of 2005 was 185.9 million versus 189.9 million for the second quarter 2004 and net income for the second quarter of this year was 85.1 million, an increase of 2.2% from 83.3 million in the second quarter of 2004.

Diluted earnings per share was $0.64 for the second quarter of '05, an 8.5% increase over the $0.59 reported in the second quarter of last year.

This was driven primarily by lower interest expense, the debt prepayment premium paid in 2004 and share repurchases during the last 12 months resulting in a 5.3% decline in average diluted shares outstanding.

We added approximately 25,100 long distance lines during the second quarter, bringing total long distance lines to a little more than 1,122,000 as of the end of June.

Long distance line penetration in our local exchange markets as a percentage of total access lines reached 49.4% at the end of the quarter versus 42.7% at the end of the second quarter of last year.

We continue to experience strong response to our DSL offerings with the addition of nearly 21,100 DSL subscribers during the quarter.

Thus, we ended the quarter with 195,000 DSL subscribers or an 11.8% penetration rate of total DSL enabled lines.

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

We began the second quarter with approximately $129 million in cash and cash equivalents and generated over $113 million of free cash flow during the quarter.

We invested $102 million in capital expenditures during the second quarter and also invested about $54 million during the quarter to repurchase nearly 1.75 million shares of common stock, increasing our percentage of the $200 million share repurchase program to 57%.

Additionally, we invested $73 million to complete the previously announced acquisition of metropolitan fiber networks in 16 markets from KMC.

We ended the quarter with more than $100 million in cash and cash equivalents As of the end of the quarter, CenturyTel's debt to equity ratio was 0.83 to 1 and net debt to annualized operating cash flow for the quarter was 2.2 times.

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 continues to generate strong cash flows and is financially strong.

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

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

Let me begin by reminding you that our guidance does not include the impact of any share repurchases that may be made during the remainder of the year under our $200 million share repurchase program but does include the KMC metro fiber asset acquisition that we closed at the end of the quarter.

Also, just a reminder that the 12.9 million shares repurchased by CenturyTel under the accelerated share repurchase agreements announced in late May were immediately retired thus mitigating the dilutive effect of the 12.9 million shares issued in settlement of the equity units in mid May.

Through the close of business yesterday, the investment banks have purchased approximately 4.1 million shares pursuant to the ASR.

Now to review our guidance.

For the third quarter 2005, we anticipate total revenues in the range of $635 million to $650 million and diluted earnings per share to be in a range of $0.65 to $0.70 per share.

A few notes regarding our expectations for the third quarter.

The third quarter results will include a full quarter of operating results from the KMC metro fiber assets acquired at the end of the second quarter, which should include approximately $13 million of incremental revenue.

The remainder of the revenue increase is primarily related to additional revenue from the finalization of study periods.

We do not expect to recognize revenue related to the finalization of study periods in 2006.

So, in building your models for 2006, please remember to take this into consideration.

More information related to this is provided in our first quarter 10-Q in footnote 11 and will also be in our second quarter 10-Q that we file early next month.

We also anticipate continued growth in our long distance and Internet and fiber business and we also expect increased costs, operating costs, primarily related to continued DSL growth and higher outside plant maintenance cost due to normal seasonality.

For 2005, the full year, we increased our diluted earnings per share guidance to $2.35 to $2.50 from $2.25 to $2.35 that was previously given.

The primary reasons behind this adjustment are the better than expected results during the second quarter, the share repurchases that were made under our $200 million share repurchase program and the continued expectation that we will be successful in containing our cost.

This concludes our prepared remarks.

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

Ladies and gentlemen, if you have a question at this time, please press the one key on your touchtone telephone.

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

Our first question comes from David Janazzo from Merrill Lynch.

Good morning.

Glen, you had mentioned some prior period adjustments in the network access revenues.

Could you or Stewart quantify that?

Sure, Dave.

Yes, the adjustments that we made this quarter were about $6 million.

All right, thanks.

Maybe, Glen, you could just give us an update on your thoughts on the M&A environment, what might be out there.

It has been quiet for awhile.

If it might be changing and what some of the drivers are.

Yes, Dave.

It is still pretty quiet out there.

We hear rumors a lot but nothing that's been substantiated so there's not a lot of activity.

Obviously if something does come available, we're going to pursue or be consistent with our pseudo very disciplined approach to acquisitions.

But there's nothing that we know of really active right now with the major deals that SBC and Verizon have going with AT&T and MCI respectively.

Those two companies appear to be the source of the possible access line sales have been in the past, anyway.

We think it will be awhile before we see anything major coming from those two anyway.

Okay.

And Stewart, looking at some the cost numbers, it looks like there wasn't a whole lot in there in terms of the satellite in the second quarter, would we see that pick up in the third quarter?

Yes.

We would expect to see it pick up a little bit.

We had said earlier that we expected $0.04 to $0.07 dilution associated with that -- the satellite and the wireless business for this year.

And we're probably a third of the way there in terms of the dilution that we've encountered through the first six months of this year.

Okay, thanks.

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

Thank you.

Congratulations on the quarter.

Glen, since -- I guess I'll just start with the question that always pops up and that's on the dividend.

What's your latest thinking on diverting more of your cash from buybacks to dividends and what's the timing for you to have a more competitive dividend, if not as high as the other RLOCs with at least the RBOCs or the S&P.

I have a quick follow-up afterwards.

Ed, we're continually looking at use of our free cash flow and obviously potentially increasing the dividend is one of those alternatives.

We like our strategy of buying back stock, we think over time it will be very effective.

We also believe it gives us the flexibility of taking advantage of opportunities to drive shareholder values in other ways.

We've looked at the leverage that some other companies have pursued as well as the dividend.

Our strategy is to continue to monitor those and look at how their stocks perform over time.

But we have not set any dates or any deadlines for making a decision to change our account structure or our dividend policy.

Just following-up a little bit on that.

In the past -- and you've been very hesitant about instituting a very large dividend comparable to some of your RLOC peers.

But you do generate a tremendous amount of free cash flow.

Your dividend per share is only about $0.24 right now.

On our estimate you're generating over $3.50 per share in after-tax free cash flow.

So there is a lot of room from your current dividend payout and the dividend payouts of the other RLOCs.

Would you be more open and willing to evaluate a dividend that might be more in the $1.00 per share range or slightly above or less than that?

And you know, something that might be substantially higher?

I can't talk about dollars and targets.

I can tell you that the issue that we deal with is how much of a dividend increase does it take to really drive shareholder value.

We can increase the dividend but it may not increase the share value so that's what we work with.

Certainly with the free cash flow we have, we have the option of increasing the dividend, fairly substantially.

The question we ask ourselves and with the bankers and our board will it really drive shareholder value or is it better to maintain our flexibility and driving shareholder value using our cash in other ways.

That's the issue.

It is a good question for you and for us.

It is something we work with every month, every quarter.

And we'll continue to monitor this.

The one thing we aren't going to do, we aren't going to foolishly utilize our cash and we're paying out -- we bought back $400 million of stock last year, $200 million share buyback this year.

Have flexibility for us to do more going forward if we decide to but we're not going to go out and spend foolishly.

We still have the ability to drive that dividend up or pay a one-time dividend.

All of those things are options for us that don't disappear because we aren't paying one today.

Sure.

You know, I do agree with your strategy on the stock buyback.

I've been somewhat surprised that the stock hasn't really borne the full effects of that in terms of the share price.

Just focusing on the free cash flow a little bit more and this might be a question more for Stewart.

When we look at your CapEx that you're spending per line, it is about 60% higher than the other rlocs, 17%, 16% of revenue.

A lot of your peers are at 10% of revenue.

You know, who's right or wrong in this situation?

Do you think that your CapEx has more room to come down and thus increase free cash flow or do you think that the spending by the other players is understated?

Thank you.

I'll take a shot at the first of that, ad your first part of the answer, I guess.

Then Stewart can answer further.

Data DSL is driving a lot of our CapEx.

We're working to cap our TDM investment as much as possible.

We anticipate, you know, an IP network of the future and we're working toward that.

Some of our CapEx is also driven by our light core operations where we're seeing good revenue growth.

So it is really the data and the new ventures that are driving some of that -- what you're seeing -- what we're paying or investing above some the other -- our peer companies.

We're spending at least our budget for this year, we expect to spend about $425 million.

Of that, slightly over 300 million in on the old telephone local exchange business, and then about $40 million on light core and about $80 million on other.

So -- .

Where do you think maintenance CapEx could be, longer term?

You know, my view is that could be around a $75, $85 per line maintenance CapEx.

Okay.

So, almost half where you are currently.

Yes.

You know, some of the capital we're spending this year, we're doing things to try to really prepare for the future.

We're taking fiber to the curb, or fiber to the premises on some of our new construction in some of our tier one markets and subdivisions where we think that it is best to go ahead and put fiber in.

So we're spending some money there that we really never spent before in the past.

I think the overarching thing would be positioning the forward looking of the network from a broadband standpoint.

Not only to the node, but as Stewart said, we're spending investment this year, probably in the mid 30s on greenfield development to get fiber to the prem.

Okay, terrific.

Thank you.

Our next question comes from Simon Flannery from Morgan Stanley.

Thank you, good morning.

You continue to drive strong DSL penetration.

I wonder if you could give us a few metrics around the ARPU at DSL and what percent of your lines are now DSL available and if you have any sense of what your market share is.

Secondly, could you just talk a little bit about the sources of line loss, is it primary, secondary, where you're seeing that?

Thanks.

As far as the DSL availability, we have it available to over 72% of our access lines to date, Simon.

The ARPU is down about $5.00 from a year ago second quarter.

Karen, do you have the actual --?

Yes, our ARPU's at about $43.70.

A year ago we still had very high priced DSL.

We've been bringing those price points down and we started giving away the modems.

What you see in that ARPU decline is not only the decline in the recurring service but also decline in not charging for the CPE with new customers anymore.

Does that answer your question?

Yes, absolutely.

That's helpful.

To what extent do -- do you have any sense of your share against cable modems in region?

We believe we have an advantage there.

We're in the process of doing a more scientific study.

We believe we're over 50%.

We were first to market in virtually all of our markets so we picked up the early adapters there.

So we believe we're ahead in our markets because of the nature of those primarily.

And on line loss, we think it is a lot of customers going to wireless.

It's inward calls, not coming to our call centers versus the number of disconnects.

We think it is driven mostly by wireless.

Karen you want to add to that?

On the access line loss for the quarter, 75% of our loss was in residential primary, 13% was second lines and 12% business.

We had some true ups going on so that's not really a fair comparison on the business side.

What's different continues to be, you know, decline in residential.

I think you've heard me talk about the ends are down.

Year-over-year ends continue to be down 12% to 15%.

Our outs continue to improve and our churn in the residential primary is pretty much flat.

On the second lines, our churns out just a bit, our churn rate went year-over-year from about 3.3% to 3.8%.

Our outs are up probably up a little over 3%.

But we also have an inward issue, too, because people aren't getting second lines given DSL and/or wireless options.

On the business front, taking away some trips.

We had last year fourth quarter, we're pretty still year-to-date kind of flat.

Clearly the issue still is primary, residential.

One of the key things, we're hoping that wireless changes that in a sense in terms of value prop as we integrate that into our wireline model and also are working on different kinds of distribution.

As Glen said, we don't assume that customers are going to move in and automatically just pick up the phone and call CenturyTel.

They have wireless options and others.

So I think an aggressive distribution play is what we're targeting.

That's very helpful.

Thank you.

Our next question comes from Tony Ferrugia from A.G. Edwards.

I just had a couple of housekeeping questions.

First of all on the prior period adjustment with access, you said 6 million.

So that would have made it lower at 233 or 234.

That was my first question.

Then on KMC, you said 13 million in revenue next quarter.

That was for the quarter and I wondered if you -- so you could verify that please.

And then I also wanted to know if you could provide us with any information on the impact that -- at the EBITDA lines from KMC and if you can't give us the specific number, could you just tell if it's going to be positive or negative?

Thanks.

Yes.

First of all I guess on KMC, from an EBITDA standpoint, we've said that basically it will be pretty much breakeven the first year.

So we would expect it to be slightly EBITDA positive.

Thank you, go ahead.

In terms of the prior period adjustments, I think Glen is getting the information there.

Tony, that was right, as far as the -- we bid 233 on the number you talked about, if you take out the 6 million.

All right.

Then the 13 million in revenue, that was for the quarter, right?

Yes.

That's correct.

That's expected for the third quarter.

We've said in the past that basically we expected the KMC markets to bring about $50 million a year annually in revenue and the next quarter we expect about 13.

The EBITDA is about $1 million positive, per quarter from the KMC acquisition.

Okay.

Thanks a lot.

Look forward to seeing you at the conference.

Thanks, Tony.

Our next question comes from Jonathan Chaplin from J.P. Morgan.

I just wanted to drill down on an earlier question, just to get a little bit more insight into what's going on in the access line front.

I understand your point that a lot of it is going to wireless substitution and that's difficult to gauge and it is an issue of ins not coming in rather than an increase in outs.

But if I look at the, just the seasonal patterns over the last couple of -- over the last few quarters, it seems like the increase from first quarter to second quarter was a lot larger this year than it has been in the past.

And overall, just the losses this quarter are greater than they have been ever in the past.

Are you seeing an increase in wireless substitution?

Is it the case that wireless coverage has become a lot better over the course of the last quarter and that's driving more wireless substitution or is there other competitive activity going on in the market?

Are you seeing any new entrance on the cable VoIP front or is there anything else we should be looking at?

Wireless, I believe, probably is the core reason.

When customers leave us, we do do a reason code.

Our customer service reps ask the customer why are they leaving us.

Of course we try to save them first.

And if you look at it it is directional because some customer service reps may market or not, but we have seen an increase year-over-year of about 1400 customers giving us the reason why they're leaving to go to wireless.

I also believe when they move in -- and you look at college seasonality which is what we're experiencing in the second quarter.

A lot of colleges have disconnects but you'll see every year less and less students reactivating a wireline phone because they're going to go just to wireless.

So, the seasonality of the colleges that we experience in second quarter when we usually reconnect in the third quarter, you can watch the trends every year.

They go down a little bit in terms of reconnection because more kids are just -- students are just using their wireless phones.

Does that answer your question?

In terms of VoIP, not a lot of incremental competition.

We do have up in Wisconsin a few exchanges that some our customers that really are served out of the Madison -- it is a charter Madison MTA that picks up our exchange Bearview(ph), Wisconsin and then another one, Time-Warner out of Milwaukee.

Now our customers can access VoIP.

That's new since sequentially last quarter.

But when you look at the competition that we had from cable from the Verizon properties we picked up where charter was already offering voice.

In St Louis at St Charles County, and you add these two exchanges, about 1.4% of our access lines have a cable VoIP capability right now.

Did you see a meaningful uptake in line loss in those markets where there is a cable VoIP offering this quarter?

Not significantly yet.

Okay.

Not this quarter.

But they just rolled this quarter.

The other thing, when I talked about the wireless in terms of the reason code, remember, a year ago we didn't have porting.

We started porting capability back in what, May, June time frame.

And we do not see an increase but we see probably 300 numbers a quarter that go out to wireless porting.

Okay.

Okay?

And I guess the one thing I'm still trying to understand is why the substitution is getting worse?

Has there been a perceptible improvement in network quality that might be driving it or is it just an issue of shifting behavior?

I really can't -- I personally don't think it is network quality but I can't say we have a data point to prove one way or the other.

I would say that generations, younger generations graduating from high school and colleges and just not using that wireline phone.

And I would say on the senior level, too, especially second homes.

Instead of when they used to come in, the snowbirds and such, come in and reconnect a wireline phone, many times they're not now, they're just sticking with their wireless phones.

Okay.

Thank you very much.

I really appreciate that.

Our next question comes from Thomas Seitz from Lehman brothers.

Yes, hi, good morning.

Couple of questions.

Typically, to follow-up on the access line loss issue, typically the fourth quarter has been your worst seasonally whereas perhaps the rest of the industry has the biggest line losses in second quarter.

Did you do any kind of trueing up or anything that impacted access lines this quarter or, you know, is it just a function of deteriorating environment and you would still anticipate that fourth quarter is seasonally the worst for you?

We did not do any trueing up, Tom, this time.

Without further information or experience, we'd say fourth quarter should be again a worser quarter for us.

But we -- we're just not sure what's driving the additional wireless uses other than just what Karen just talked about.

We think that will continue to some degree in the month ahead.

Okay.

Second question, DSL adds were nice but they were sequentially down from the first quarter.

Was there a drop-off in marketing activity, anything different as to why there was a fairly significant slowdown in DSL adds?

Not a drop-off in terms of the approach in the market place or frequency.

I would say when I looked at some of the RBOC numbers, we're in line.

Their range is -- sequentially we're down anywhere from 28% to 50%.

So, I think it is seasonality.

Okay.

And then just one final question.

I will obviously take a good look at footnote 11, but the access line or access revenue deterioration was about 200 basis points better this quarter versus the first quarter.

Stewart, did you say that you also anticipated a bit of a true up in the third quarter and, you know, that access revenues probably are going to be a bit higher this year than they are going to be next year?

Yes.

Is that the implication there?

That's exactly right, Tom.

We'll have study periods that will close out September 30 of this year.

And so we would expect to book the access revenue related to that, that true up, in the third quarter.

And then that will not reoccur in 2006.

So the sort of 2.2% drop-off for this quarter is probably closer to where we'll be versus the 4.4% drop-off in the first quarter?

You've still got $6 million in this second quarter, you know, that we wouldn't expect to reoccur either.

Okay.

Okay, gotcha.

Well, thank you very much.

Our next question comes from Chris King from Legg Mason.

One quick housekeeping question, following up on Tom's last question there.

Just doing some quick back of the envelope math here.

It would look like given your guidance that you're looking for roughly $10 million or so in prior period adjustments in the third quarter on that network access line, just wanted to confirm that.

And the second question is just a quick update on intercarrier compensation and whether you guys have a new updated timeline for some decision making processes in Washington with respect to that issue.

Chris, we would expect it actually be higher than the $10 million that you mentioned in the third quarter.

So, we just -- we would expect that to be higher.

And again, that's finalization of the cost studies that are out there.

Periods will close at the end of September.

Regarding intercarrier comp, there was a Bill introduced, I guess yesterday, by Senator Ensign and it is regarding the whole array of regulatory issues, basically, including a inkira(ph) compensation that is pretty interesting.

It looks pretty favorable overall from our standpoint.

We don't know how far it will go.

As far as the SEC's actions, it is hard to say.

I think we -- we've submitted our comments on their intercarrier comp issue, a request for comments and we don't know when to expect.

Karen, do you have any idea when we expect?

Not by the end of the year although Glen spoke at -- keynote speaker at NARUK(ph) and we got the Martin takeouts, what he said.

We're encouraged by our meetings with the Chairman.

I think what's key on intercarrier is that they're going to want to get their two new commissioners.

They got one vacancy and going to have another one shortly.

I think that's important for them to make sure that they have their process in votes.

But from a Martin perspective, some great things came out of his address to NARUK here that was in Austin this past week, where he does understand that, you know, what were in our comments, key things that are important, intercarrier comp or there's some next steps in terms of reducing arbitrage, the same on traffic and creating the efficiencies and encouraging the investments.

And he's come out and said that, you know, in his opinion fill or keep was not politically viable.

Those are encouraging words from our stand point.

They parallel with what Glen presented.

They parallel with what we've been working with at the FCC and all the sub groups.

So we're encouraged, time line is probably 2006 though.

Thank you.

Our next question comes from Daniel Henriques from Goldman Sachs.

Hi, good morning.

My question is to understand a little bit better the guidance for the second half of the year.

If you just use last year revenue as a start of 607, you add 13 million for KMC, you got your 620.

Your guidance is 635 to 650.

So, is it fair to say that the study adjustment is between 15 and 30 million for next quarter?

That's a pretty good range.

I guess what we're expecting is somewhere in the neighborhood of a $25 million or so increase.

Is this 100% margin?

Yes.

Because if it is 100% margin, what I'm trying to understand, you beat the top-end of your guidance for the second quarter by about $0.05.

If you get $25 million, you tax for -- it is only third quarter, by the way, or also fourth quarter?

Only third quarter.

We do expect expenses up -- we would expect expenses to be up in the third quarter as well.

Generally, if you look back just from a seasonal standpoint, we get to do more maintenance generally in the third quarter just due to the weather than we do in any other quarter.

Our expenses typically go up there.

And also, you know, just with anticipating additional DSL adds and the strong DSL adds that we had in the second quarter, that will cause more expense in the third quarter as well.

For instance, it fair to say that because you get $25 million at 100% margin in the third quarter, you tax it and it is about $0.11 per share.

If you add that to how much you beat in the second quarter, $0.05, your raising your guidance by $0.15.

That's purely second quarter actuals plus including the study in your guidance.

There's nothing in your guidance for the second half that's really operational that you're getting more bullish on, is that a fair statement?

Yes.

We already had the expected third quarter revenue in our guidance.

It was in our guidance previously.

So if you look at going from say $2.35 or so up to $2.50 or so, basically, you know, $0.09 is the second quarter results.

We've actually taken into consideration about $0.04 of expected expense reductions or savings over what we previously included in our guidance, you know, for third and fourth quarters.

So we're building in some of our ability to be able to control expenses during the third and fourth quarter.

And then the share buyback adds a couple $0.02 to the outlook as well.

Okay.

That's helpful.

The second question, in terms of satellite agreement, your agreement was a little bit inspired in the SBC model and SBC is reconsidering the way the agreement is set up.

Can you comment on your latest thoughts about how your agreement is right now and any changes you may consider doing there?

We feel pretty good about our agreement right now.

On the CPE side we don't own on the customer premise the set top box.

EchoStar owns that.

Which is, we believe, is the better way to approach the resale agreement.

We would like to see better margins there.

But over time, we'll see what we can work on those.

Right now, we feel okay with where we are.

Final question.

You have a poison pill agreement that expires, I believe, in November next year.

And can you talk a little bit about your thoughts about extending it or changing it or any thoughts and what do you need, is it shareholder approval, it's just the board that decides about extending or changing it?

Really, we haven't talked to the board about that.

We haven't discussed that so it is not in our radar yet.

I'm sure we'll be looking at that in the months ahead.

Thank you.

Our next question comes from Kevin Moore from Wachovia Securities.

Just following a little up on guidance.

You mentioned $0.04 and sort of expenses or expense reduction factored in your estimates.

Is that just in the third quarter or does that include the fourth quarter as well and is that a number we can also carry out into '06?

No, Kevin, that includes both third and the fourth quarter.

Okay.

And what sort of sources of the expense reduction?

It is really just our budget.

It is basically just that our -- we're expecting to be able to spend less than we had budgeted and we've basically been using our expense budgets to build our guidance numbers in the past, which we've always used.

But we're just optimistic, I guess, about being able to really control expenses both from an employee standpoint as well as just other direct expenses during the last half of the year.

That's something that we could carry out going forward though into '06 as well.

Yes, we would hope to be able to -- you know, you'll have just general inflationary increases but we would hope to be able to control expenses as well next year.

Just a quick follow-up also, on the $6 million in true up and network access, I guess that was about -- flowed right to the bottom-line as well, minus taxes and so we calculate that would be about $0.03 per share for just this quarter.

Is that where you guys are thinking about it as well?

Yes, that's right. $0.025 to $0.03.

All right, thank you.

Our next question comes from Phillip Olsen from UBS.

Hi, just a couple of quick questions.

First, during your prepared remarks you indicated that it is your desire to maintain financial ratios that you believe would be consistent with investment grade rating.

I would just like maybe some insight as to what you think those ratios are.

And secondly, in terms of kind of capital structure policy, what do you think is the appropriate discount from a valuation perspective that you would be willing to tolerate versus where your stock trades, versus appear like citizens before you would feel the need to maybe accelerate the revaluation of that.

It looks, right now, the stock trades at a fairly significant discount and how much of the discount should it be in order to be able to retain the added flexibility that you currently enjoy?

Thanks.

Phillip, just from the standpoint of our maintaining our investment grade ratings, we believe, at least at S&P, that we need to stay in the low 2 times, low 2s in terms of net debt to EBITDA to be able maintain the ratings that we have.

Okay.

Regarding the cap structure policy and how much of a discount we require before we can make a change, that's hard to say.

We're obviously monitoring the performance.

These other companies have taken these other steps and different approach.

We do believe that financial flexibility is important right now.

You know, once you take those steps to leverage up and pay a higher dividend, basically trade like a bond.

You're going to trade with interest rates.

We believe that there are ways to drive shareholder value in the right circumstances here that could be much more attractive than just the leveraging of paying a higher dividend.

However, we realize that has been effective for some companies.

We monitor our board -- talks about this every meeting.

It is something we're very cognizant of.

We don't plan to hoard cash.

It is an issue of what's best way to drive long-term shareholder value.

We believe the stock buyback program we have today and maintaining our financial flexibility over the long-term will prove to drive credit shareholder value.

That's our view today.

Would it be fair to assume that your preferred avenue for driving shareholder value would be acquisitions and in the absence of attractive candidates, then the share repurchase becomes the next priority?

Well, I would say that we certainly are looking for the opportunity for acquisitions as one alternative.

There are other ways to increase the business or invest in new technology and other opportunities as well.

The share buyback program is certainly attractive to us today.

We think our stock is as good a buy as any out there.

So, we'll weigh the acquisition opportunity against the alternative of buying our own stock.

We have not set any set priorities or what's best.

We look at every opportunity based on discounted cash flow analysis and what we can do in driving long-term shareholder value.

Great.

Thank you very much.

Our next question comes from Frank Louthan from Raymond James.

Okay, great.

Got a couple operational questions here.

On the fiber network, can you give us a little more color there?

What's your organic growth rate on the fiber and the transport business and can you give us an idea of the ballpark breakout between the wholesale and resale?

Wholesale revenue and retail.

And then how much of the cost savings is coming from that that you're experiencing, for some of your earned traffic on that network either regionally or within local markets?

Then can you give us an update on converting your dial-up base to DSL?

I think you had some interesting marketing plans in the last quarter.

Can you give us an idea of where that is going?

Lastly, can you give us an update on USF in the quarter?

What the national average cost per loop has done, if that's been adjusted so far this year and where you're tracking on the downward pressure, I would assume is coming into USF, year-to-date relative to expectations at the beginning of the year?

Wow, Frank, those were more than few.

I'll start and let Glen and Stewart chime in.

On the organic fiber network growth it is about 29%.

In terms of your question between wholesale and retail, I think you're talking about the way we reported externally in combination of.

CLEC and the wholesale business?

Yes, that's correct.

We don't -- I don't think we're reporting on that.

Cost savings from bringing our circuits on net, that would be what we've been talking about in terms of our -- what we're paying ourself at this point.

We have, from that standpoint, more than, on a quarterly basis, about 5 million on a quarter basis.

Don't have that comparison actually from last year but we have about 5 million right now that we're paying ourself that we would have been paying an external on a per quarter basis.

And then conversion of dial to DSL, in terms of the migration where our -- I want to make sure I answer the right question here -- but a dial customer that migrates to DSL, percent of those is 30% of our DSL inward were from our dial migration.

And that's up.

A year ago, we were probably 6% to 7%.

We're in the 30% plus range as we speak.

And Frank, universal service revenue for the quarter, the interstate or federal universal service was a little over $45 million.

Our intrastate or state universal service was $8.8 million, so we had a total of $53.8 million of universal service in the second quarter.

That's up a little bit from the $53 million that we had in the first quarter, primarily due to some of the safety valve universal service revenue that we started receiving this quarter related to some of the Wisconsin properties that we purchased from GTE.

And it will be about $0.5 million a quarter going forward.

Okay.

National average cost per local loop, as from our standpoint, it is tracking about where we thought it would when we gave our guidance at the beginning of the year.

Okay.

Have they updated that number?

Frank, I think it has been updated but I don't have access to it right now.

That's something we can get for you though.

Okay.

One quick clarification on the access line losses, it sounds -- is it fair to say that if the losses are coming from, say the snowbirds or maybe some of the vacation homes and college students, that those are generally lower ARPU customers or are you seeing any sort of your larger ARPU customers, are you losing that as well or is it mostly lower ARPU?

Still doing a lot of data work around that.

But directionally, we believe that the customers that are the in customers, for lack of a better word here, actually have a higher ARPU than the customers that we're losing to out.

To answer your question, that's correct.

Okay, great, thank you very much.

ladies andgentlemen, this concludes our Q&A session.

At this time I would like to turn the conference back over to Mr. Glen Post.

Thank you.

In closing, CenturyTel achieved solid overall results for the second quarter.

We remain committed to being the broadband provider of choice for the customers in the markets we serve, As we believe this strategy enhances our ability to successfully deliver new services and increase revenues in the months and years ahead.

Also, we will continue to expand our products and our bundled service offerings as well as integrate the KMC assets and their operations in the coming months.

And we'll continue to focus on how to best utilize our strong cash flows to drive long-term shareholder value.

Also, we will host our west coast analyst conference in San Francisco on August 9th and our east coast conference will be held in Boston this year on September 14.

Hopefully you can join us for that.

If you would like to join us, you can contact Tony Davis and he will provide you with the information.

Tony's contact information is located on the Investor Relations section of our corporate website.

So, thank you again for your participation in our call today.

We look forward to speaking with you in the months ahead.