Lumen Technologies Inc (LUMN) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CenturyTel, third-quarter 2005 earnings call. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is also being recorded.

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

Sir, you may begin.

Thank you.

Good morning, everyone, and welcome to our call today to discuss CenturyTel's third-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 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 today particularly as it they pertain to guidance for fourth-quarter and full-year 2005, guidance relating to certain items related to 2006 and other outlooks on 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 November 2, 2005 and accessible for webcast replay through November 16, 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 today, October 27, 2005 and should be considered valid only as of this 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.

And thank you for joining our call today as we review CenturyTel's third-quarter 2005 operating performance.

Let me begin by saying the third quarter was certainly an unusual quarter as CenturyTel and many other companies dealt with the effects of hurricanes Katrina and Rita.

At CenturyTel we were fortunate that our operating properties were not severely impacted by the storms.

And in the areas that were hit, we are thankful that all our employees and their families were unharmed.

The CenturyTel areas impacted by the storms were confined to our southern Louisiana and Alabama properties were 35,000 to 40,000.

Our customers were impacted to varying degrees by the storms.

Fortunately our field service team was able to restore service to most of these customers in a relatively short period of time.

I am pleased with the way our employees responded in affected areas, especially when many of these employees faced personal property loss from the storms as well.

Even with these challenges experienced in the third quarter, CenturyTel delivered solid financial results.

Earnings per share excluding nonrecurring items of $0.74 for the quarter or $0.04 ahead of First Call consensus estimate of $0.70 per share.

Primarily driven by cost controls and higher-than-anticipated prior period adjustments related to network access and data revenues.

CenturyTel continued to achieve year-over-year revenue growth in the third quarter, in spite of anticipated revenue declines of $10 million related to lower high-cost loop report, lower intrastate access revenues, and revenues declines related to the access line losses.

This increase in revenue was primarily due to the recognition of revenues associated with the finalization of study periods, revenue from the KMC Metro Fiber asset acquired at the end of the second quarter of this year.

Also data revenue growth which was driven by strong growth in DSL subscribers over the last 12 months.

And finally, solid revenue growth from customers utilizing our LightCore regional fiber transport network helped drive the increase.

Customers continue to show strong demand for CenturyTel's bundled offerings as we ended third quarter with nearly 330,000 access lines in bundle at 23% increase during the last 12 months.

Simple Choice customers now represent 18.5% of our residential access lines compared to 14.5% at the end of the third quarter of last year.

Additionally, customers continue to show strong interest in CenturyTel's DSL offerings as we added more than 25,000 DSL customers during the third quarter, more than double the 12,000 added in the third quarter of 2004.

We ended third-quarter 2005 with nearly 220,000 DSL subscribers or 13.4% penetration of total DSL enabled lines compared to 7.8% just a year ago.

We also added approximately 20,000 long-distance lines during in the third quarter bringing total long-distance lines to more than 1.1 million as of September 30, 2005.

Long distance line penetration at our local exchanges as a percentage of total access lines reached 50.7% at the third quarter 2005 compared to the 44.4% at the end of the third quarter of last year.

Within the past 12 months, we increased our DSL customers served by nearly 82% and our long-distance lines served by more than 10%.

We also continue to drive strong cash flows and generated more than $127 million of free cash flow during the third quarter.

CenturyTel did not prepurchase any shares under our $200 million share repurchase program during the third quarter.

As we previously communicated to you we will remain out of the market while shares are being purchased under a the accelerated share repurchase agreements we executed in May of this year.

We still have about $86 million outstanding under our current $200 million share repurchase program and we currently anticipate completing this program once the accelerated share repurchase agreements are fulfilled.

Before turning the call over to Stewart for additional comments on the financial results for the quarter, I want to provide -- provide updates on our newer initiatives, satellite, television service, wireless, and switched digital video.

First, you will recall that during the second quarter, we began offering dish satellite television service across selected markets in our service area.

During the fourth quarter, we will be rolling out our discounted bundles with the DBS product included.

We expect to expand that rollout across substantially all of our service areas by the end of this year.

As for our CenturyTel branded wireless service initiative, we continue to launch wireless service in selected markets later -- later this year as we complete agreements with additional wireless carriers.

We continue to have discussions and negotiations with other carriers which we expect to complete in the month ahead that should help ensure quality wireless coverage in various markets across the country.

We do believe the wireless product will be an important part of our product offerings in the months ahead.

Additionally, with regard to switched digital video, we moved from this trial stage to a soft launch in the portion of the Lacrosse, Wisconsin market during the third quarter and we expect to commercially launch this service during the fourth quarter.

And we look forward to monitoring the results of this service over the next few quarters.

We expect to limit the expansion of this service until equipment prices, of course, reach more affordable levels.

Finally, an update on the KMC Metro Fiber assets acquired the end of the second quarter.

We have begun to successfully integrate these operations into CenturyTel and these assets performed in line with our expectations from a financial perspective during the third quarter.

These Metro assets expand our competitive local exchange carry operations, they provide us the opportunity to market a full array of advanced communication services to a broad base of business customers and advance -- it advances our strategic goal of growing and diversifying our revenue streams.

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

Stewart?

Thank you, Glen.

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

All comments on actual results exclude those nonrecurring items detailed on the financial statements accompanying the press release.

For third-quarter 2005, operating revenues increased to $657.1 million, up from 607.4 million in third quarter of '04.

Our local service revenues for third-quarter of 2005 were 176.1 million compared to 179.8 million in third quarter of 2004.

Access lines declined a little less than 23,000 lines during the quarter, and we ended the quarter with approximately 2,250,000 access lines.

Network access revenues were 257.6 million versus $240.6 million in third-quarter of 2004.

This $17 million increase resulted primarily from adjustments to recognized prior period revenue settlements which were partially offset by the anticipated decrease in access and universal service fund revenues.

Long-distance revenues were 49.8 million versus 49.7 million in third quarter of '04.

As increases due to customer growth were offset by a decrease in the average rate per minute of use.

Our data revenues increased 27% from $70 million in third quarter of 2004 to 88.9 million in third-quarter of 2005, primarily driven by continued strong DSL subscriber growth, as well as adjustments to recognized prior period revenue settlements.

Our fiber transport and CLEC revenues increased 90.2% to $36.4 million in third quarter of 2005 versus 19.1 million in third quarter of 2004, primarily due to the second-quarter 2005 KMC Metro Fiber asset acquisition, as well as continued growth in the fiber transport and CLEC businesses.

Our operating expenses increased $23.7 million, driven primarily by increased costs related to growth in our DSL subscriber base and by the KMC Metro Fiber asset acquisition.

Operating cash flow for third-quarter 2005 was $340.6 million compared to $308.2 million in third quarter of 2004.

For the third quarter of 2005, we generated an operating cash flow margin of 51.8% compared to 50.7% reported for the third quarter of 2004.

Our operating income for the third quarter of 2005 was 207.1 million as compared to 181.2 million for third quarter of 2004, and net income for this quarter was $99 million, an increase of 22% from the $81.1 million in the third quarter of last year.

Our diluted earnings per share was $0.74 for the third quarter of '05, a 25.4% increase over the $0.59 reported in third quarter of 2004, driven primarily by revenue increases and share repurchases during the last 12 months, resulting in a 2.8% decline in average diluted shares outstanding.

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

We began the third quarter of 2005 with approximately $100 million in cash and cash equivalents and generated a little over $127 million in free cash flow during the third quarter.

We invested approximately $106 million in capital expenditures during the quarter, and ended the quarter with more than $268 million in cash and cash equivalents.

As of September 30, 2005, CenturyTel's debt-to-equity ratio was 0.8 to 1 and net debt to operating cash flow annualized was -- for the first nine months of the year was 2 times.

We expect to continue to maintain our ratios at a range that should enable the Company to maintain its investment grade ratings.

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

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

Finally, I will briefly discuss the 2005 guidance provided in our third-quarter 2005 earnings release.

As always, our guidance excludes nonrecurring items.

For fourth-quarter of 2005, we anticipate total revenues to be in the range of 610 to $620 million.

Since the fourth quarter is historically our most difficult quarter of the year in terms of access lines, we expect fourth-quarter line losses to exceed those experienced in the third quarter.

We also expect diluted earnings per share to be in the range of $0.52 to $0.56 for fourth-quarter of 2005.

This is down from the results reported today primarily due to the favorable third-quarter adjustments to recognize prior period revenue settlements.

Taking into consideration our year-to-date results and our fourth-quarter guidance we have narrowed and increased our anticipated full-year 2005 fully diluted earnings per share to the $2.49 to $2.53 range.

I would like to conclude my remarks today with a few comments related to 2006 that will hopefully help you update your models for '06 since according the First Call analyst 2006 earnings per share estimates currently range from $2.22 to $2.54.

First, increase national average loop costs are once again expected to negatively impact CenturyTel's universal service fund receipts and diluted earnings per share by $0.06 to $0.08 per share.

We are using a nationwide average loop cost of about $325 is what we expect in 2006.

Our revenue settlements related to prior periods are anticipated to decline and negatively impact fully diluted earnings per share by $0.14 to $0.18.

The change in accounting for stock options is anticipated to reduce fully diluted earnings per share by $0.05 to $0.06 however, keep in mind that this is a noncash expense.

Additionally we expect lower 2006 interest expense to contribute $0.03 to $0.05 to diluted earnings per share next year.

We also currently anticipate completing the remaining $86 million outstanding under our 200 million share -- $200 million share repurchase program once the investment banks have completed the accelerated share repurchase programs which we now expect to occur sometime in December.

Additionally, we believe we will continue to drive growth in our broadband and fiber transport businesses in 2006 and beyond.

This concludes our prepared remarks.

We will now open the call for a few questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Michael McCormack from Bear Stearns.

Good morning, guys, thanks.

Just on your fourth-quarter EPS guidance, I'm just running through my numbers, and I think I am sort of midpoint on the revenue guidance.

I think the guidance is implying a fairly significant takedown in margin.

I think I have got about 330 basis points to get into your range.

If you can just -- I know you've mentioned a couple of things.

Is there any settlement revenue in the fourth quarter.

And on satellite and video, I know you have only done about a third to the second quarter of that dilution.

Are we going to see that ramping up significantly in the fourth quarter?

Thanks.

Yes, in terms of dilution from new initiatives next quarter, we expect it to be about $0.01 a share.

And, no, the -- any proper adjustments that we would have in the fourth quarter would be immaterial.

We expect maybe possibly about $1 million or so.

So really the margin decline that you are looking at is related to the fact that, we had prior period revenue adjustments in the third quarter, and we will not have very much at all in the fourth quarter.

Okay, great, thanks.

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

Hey, guys.

Good morning.

First, I guess, Stewart -- I guess I have to ask what the magnitude of the prior period adjustment was?

It looked like it came in -- maybe the data revenue line and kind of flowed into the EBIT margin line this quarter.

And second, I guess part of the guidance looking forward for next year assumes that all these prior period adjustments that we have seen year-to-date kind of drop out, but could you be kind of more specific.

It seems like these prior period adjustments are going to happen every quarter.

Is there anything that you could look at now that we should anticipate ahead of time as a prior period adjustment that would affect those earnings going forward?

And then last, with respect to the fourth quarter line numbers in terms of the guidance, in terms of the increase over third quarter, is this -- do you see it as purely being driven by seasonalities?

Or any other competitive force at work that you see incrementally in the fourth quarter versus the third.

Thanks a lot.

Okay, David.

In terms of the magnitude of the proper adjustments in the third quarter, there was about $34 million in total.

About $25 million of it was related to switched access and would be in the network access line and about $9 million or so was in the -- was related to data and would be in the data line.

And basically this is due to the window period closing.

Since we are rate of return regulated interstate jurisdiction, for the most part, it's related to the window period closing at the end of September and the next window period will not close until September 30, 2007.

So we would not expect to have much in terms of property adjustments next year.

In terms of I guess fourth-quarter access line losses, they are generally higher in the fourth quarter, due to seasonality, due to the winter months in some of the northern markets.

And potentially a slight increase in competition in the fourth quarter that we're expecting, but, mostly, the wireless -- the losses will continue to be related to wireless, we think.

All right, perfect, thanks a lot.

Our next question comes from Frank Louthan from Raymond James.

Good morning.

Maybe you can give us a little more color on how your CLEC and the fiber business are doing.

I know you saw a little bit of an increased business in some of the areas in northern Louisiana.

Is that -- how much of that do you expect to continue on an ongoing basis as sort of some relocation out of New Orleans.

And can you give us some color on -- on your DSL program?

Were you doing any special promotions?

I know you've pretty aggressively targeted your dial-up base in the past.

Was -- is that sort of a continuation of that?

Can you give a little color on the strong adds.

Thanks.

Frank, I will talk about CLEC and fiber and let Karen take the one on DSL.

We are seeing in our fiber business, consistent growth there.

I think we're in about 25% range of -- from the -- from an ongoing standpoint about annual growth about 25%.

The CLEC business -- of course our CLEC business has been small.

In North Louisiana we've expanded that with KMC acquisition.

We are just getting started there but we see a good opportunity there.

We think there's good potential there.

We added 100 on and off-ramps to fiber network.

We have some really good fiber rings in these smaller cities that we will be able to -- to, we believe, capitalize on.

So we feel good about that business.

Expect to see continued growth there in those operations.

Relative to DSL, we have a -- we had a vertical offer out for 24.95 this quarter, and we believe that helped drive inward as well as our continued pricing in our bundles.

Basically our bundle pricing starts at $30 for 768 speed and then $40 for the 1.5.

So good take rate on the vertical and the bundle.

Okay .

Great.

Can you give us an update on intercarry compensation.?

Any changes there?

Would you expect any concessions from the IXCs on the intercarry comp as far as getting their -- the merger agreements done, possibly in the next few weeks?

I would say that people are very interested in talking.

We think that's a good thing.

There was also a pretty active group out of [Naroot] led by commissioner Ray Balm during the Naroot session I think all of the groups will be at the table.

And that will be early November, there will be quite a bit of discussion, Frank, going on at that time.

Great.

Thank you.

Our next question comes from Jonathan Chaplin from JP Morgan.

Hi, good morning, thanks.

I had a quick question just on margins, basically a follow-up to an earlier question.

So it looks like if I back up the settlement revenue that EBITDA margins would have come in close to about 49%.

Being the settlement revenue is 100% margin.

I wonder if that's a good jumping-off point for 4Q and for 2006?

And then a quick question on CapEx.

It looks like your CapEx is coming in under budget.

I am wondering if the spike you are expecting in the fourth quarter is all related to spending on wireless and video?

Or whether there is an opportunity for your Cap Ex to come down?

And then whether '05 is a good indication of where CapEx should be for '06.

And then finally, I was just wondering if you can give us an idea of where DSL ARPU is for the overall business.

Thanks.

Jonathan, concerning the margins, I think you've -- the 49% is a pretty good jumping-off point.

We expect somewhere in the 49 to 50% range probably.

Again, the revenue that's growing is a lower margin revenue associated with the fiber business and DSL.

And the revenue that's declining which has been the case for the last couple of years is a higher margin universal service and access revenues.

So I think you are correct there.

In terms of CapEx, we expect to spend close to the budget that we had in 2005, which we have said is about $425 million, so we still do expect to come in somewhere around in there.

The -- our approach to wireless, though, does not really require any capital because we are a reseller there, same thing associated with the DVS video service that we are providing.

No capital there either.

The capital that we will spend in the fourth quarter, with the acceleration in DSL that we have seen, we want to make sure that we have got plenty of capacity out there for our customers to be able to continue to increase the DSL customer base.

So we will be focusing on that.

In terms of the 2006 capital budget, we don't -- we are not there yet in terms of finalizing it.

So we don't really have any specific guidance at this point; however, because we have made relatively significant network investments over the last several years, we anticipate our capital budget being less than the amount that we expect to spend in 2005.

Thanks.

If I can just follow up quickly.

So the -- where is your -- where did you end in terms of DSL coverage at the end of this quarter?

And where will that be going at the end of the year?

DSL coverage, we have 73% of our customers have access to DSL today.

We will be looking more to expanding capacity in the markets we have rather than expanding coverage areas in the next several months.

So we will be focused more on that issue than going into the smaller markets.

There will be some expansion, but not to the extent we have seen in the last couple of years.

Thank you very much.

Our next question comes from Robert Schiffman from CFSB.

Good morning, everybody.

A couple of questions around the balance sheet and M&A.

I am just trying to get a better sense of the commitment to investment grade ratings and why it is so important.

I am assuming and you've been outstanding consolidators over the past few years and there's M&A activity.

If that is the case though, what is your long-term optimal capital structure?

Does it look DDD or does it look DD.

It is still pretty obvious with another DD ILEC out there trading at a higher multiple.

Seems like the equity guys would pay more for that.

On top of that, just the whole concept of M&A, we have the larger guys punting their wireline businesses as they underperform.

So id you really are focused on M&A why are you guys in a better position to manage these properties than the other larger diversified names?

And then lastly, what are you interested in?

What's out there?

What do you see happening in the next 12, 18 months?

Thanks.

Well, first of all, the -- we like the -- we prefer the remaining investment grade and that's our objective today , because it gives us more flexibility.

It just leaves our options open.

It gives us flexibility in terms of -- positions in terms of investments in the network.

Opportunities and speaking ways to drive revenue growth.

We just think there is a lot there.

We don't see a need to lever up at this point.

We think that levering up we can drive -- we can certainly drive some short-term increase in the stock price.

We are not sure that that's lasting.

We will continue to monitor these companies that have levered up and increased the dividend to 70, 80% payout ratios but we don't believe that is the best strategy for us.

And we realize that's a contrary view right now, but that is what we believe and that is what our objective is at this point in time.

So as far as the long-term our optimal capital structure, we don't just set a line incent, this is the optimal capital structure.

We feel very comfortable where our cap structure is today, but we haven't drawn any -- made any commitments or set any specific goals that we want to be at this -- at this particular point.

As far as cap structure is concerned.

Your question on M&A.

Wireless is dumping wireline and CenturyTel in the wireline business.

I think -- when we say "dumping wire line" I'm sure you are talking about the Companies who announced considering expands to their wireline.

Have spun or are considering spends in their wireline properties.

And I think a lot of that is related to the structure of their business, being primarily the wireless and needing to see the full value of the wireless in the stock price.

Not that they necessarily think it is a bad business.

Certainly this is a tough business today.

There's a lot of challenges in our sector.

We believe that we will be successful in meeting these challenge for the next few years, and there are growth opportunities ahead.

So we believe the broadband opportunities especially and networking opportunities that we see out there will help drive growth in the years ahead.

Do the Alltel properties look attractive to you?

Well, as a matter of policy, we don't comment on acquisition opportunities.

Like I say, we don't feel compelled to grow through acquisition.

We don't have to grow through acquisitions, and whatever we do, we will continue our very disciplined approach to evaluating every opportunity and we'll only proceed when we believe there is a clear opportunity to grow long term shareholder value.

I appreciate the opportunity.

Thank you.

Our next question comes from Kevin Moore from Wachovia Securities.

Good morning.

A couple of questions.

On the guidance for next year, when you say it is dilutive.

I mean, should we think about that relative to this year's guidance or relative to this year's guidance minus all this sort of true-up in settlement revenue?

And then the second question I have is in terms of the potential Alltel spinoff, you've talked about waiting for that once in a lifetime opportunity.

Is this the kind of opportunity that is in that category for you guys?

Kevin, in terms of the guidance for -- for '06 or the items that we discussed at least, all of that -- all of those items should be viewed relative to the guidance that we have given for full-year 2005.

Okay.

Regarding your question on the Alltel spinoff, again, we just don't comment on acquisition opportunities.

Certainly they have some good assets and they are a good company, but beyond that, I can't comment any more on that.

Thank you.

Our next question comes from Jason Armstrong from Goldman Sachs.

Great.

Thanks.

A couple of questions.

First and foremost, Katrina.

You mentioned 35 to 40,000 impacted lines.

I was wondering if you can give us any measure of absolute disconnects from that number of lines that may have impacted trends this quarter.

And then second as it relates to access line loss, continues to accelerate the rate of erosion was 40 basis points worse this quarter than it was last quarter.

I think you guys still would mainly attribute it obviously to wireless.

Can you give us a better sense as to how wireless competition is evolving in your markets.

Is it better coverage, is it cheaper plans, more competitors?

Any sort of insight here.

And then final question more of a data point.

Can you just walk us through the current access line mix in terms of consumer versus business and then maybe split out consumer by primary and secondary lines?

Thanks.

This is Karen Puckett.

Let me start first with the hurricane.

We had 3,000 customers that we have delayed on disconnect notices of which we think probably 1,000 won't return.

So it wasn't a huge impact but certainly if you're one of those people that have lost their homes, you feel differently about that.

So that's that question.

In terms of access line erosion, I think what we see here is -- let me just give the numbers, because I know it's going to come up anyway in terms of our loss that we had this quarter. 80% was residential primary, and 20% were second lines.

Our business continues to be growing or flat.

If you look at this -- the loss year-over-year, third quarter of last year, third quarter this year, the difference really is is that we have an increase of primary losses of about 100%.

It is about double.

It continues to be an inward issue where inwards are down about mid-teens which has been a consistent trend for us on the primary residential.

On the second line.

It is probably both inward and out because of DSO displacement.

It has increased a bit quarter over quarter but we also don't have the demand for second lines as we used to.

Okay.

And then comments on the--.

Wireless.

The wireless.

Yes.

When you look at -- if you take your primary lines and you look at your exchange and where you're losing them, it's not -- or where you are not getting your inward demand.

It is not just competitive markets.

It is about half and half.

It is markets where we have no facility-based competition so it leads to you believe it is wireless, and some areas where you know there may be a challenged economy.

So when you look at lower income, we do believe that there is a trigger point there when people move or move into an exchange that they reassess.

And perhaps don't purchase the wirelines cell and they purchase wireless, portability.

In terms of incremental buildout on wireless, our new plans, I mean, there's always new plans, but we don't see a huge difference in terms of the quality of the service in our areas.

And in terms of the access line mix, we are about 75% residential and 25% business and of the 75% residential, we have about 6.2% second lines.

That's 6.2% of the 75%?

Yes.

Okay.

Great.

Thanks.

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

Thank you.

Just a couple of quick questions.

Long distance revenue looked like it might have had a little something extra in it this quarter.

Can you tell me whether that was just a normal run rate for the third quarter and if I should look at that as being a normal run rate when I am making my estimates for future quarters?

And then also could you just give me a -- tell me what numbers you are using for first, second, and third quarter, I mean for third quarter, I think you are probably using $0.74, but just to reconcile it to your guidance, could you tell me what you are using for first and second quarter?

Thanks.

Okay, Tony for the second quarter of this year, we had about $2.8 million in long distance related to a true-up.

And in the third quarter -- generally the third quarter, there is a little bit of seasonality in terms of minutes are a little higher and I think that probably impacted revenue a little less positively, a little less than $0.5 million.

In terms of the other -- will you restate the second part of the question.

Just for your -- for your full-year guidance, I was just asking you to tell me what you are using for first and second-quarter EPS.

And I assume you are using $0.74 for the third-quarter EPS.

To get to your full-year guidance of 249 to 2.53.

$0.59 in the first quarter.

Okay.

And $0.64 in the second quarter.

And then $0.74 in the third.

And then $0.74 in the third.

Okay.

Thanks very much.

Sure.

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

Thank you, good afternoon.

Given your stock's current valuation, do you think it is more attractive to buy back your own stock at this point versus buying other companies?

And secondly on the acquisition opportunities primarily related to spinoff from companies that have recently undergone M&A.

If you were to make a bid are you effectively limited to using stock due to tax considerations?

Or could you pursue a cash in that bid?

Thank you.

Ed, regarding our current stock value.

We do think our stocks is at a price that we should be buying it back, and we have been doing that as you know.

Last year we had a $400 million stock repurchase program we completed -- we put in place a $300 million program earlier this year at which we bought back I think $114 million through May then we replaced the accelerated stock repurchase program with -- associated with the stock or the equity units.

And, of course, that's keeping off the market $500 million of stock that would have been out there.

So in essence, we are buying our stock back on a continual basis.

That has been our really strategy here from a use of free cash flow is buying back our own stock.

So we do believe in our stock and we are doing that on a consistent basis.

As far as the transactions.

Obviously the size of the transactions indicates or determines how much cash can you revert to stock.

If you look at the really large transactions there's going to have to be stock used obviously..

When you have a huge number of lines compared to the Company's size of our size or anybody else's, so we wouldn't be looking a at stock.

If it's a smaller acquisition, say in the million access line category we could possibly look at cash type transactions.

You you get over that then there has to be some kind of equity involved, we believe.

Is it fair to say that -- in the past you have always given priorities in terms of use of cash in your resources, that -- M&A was sort of at the top of your list, but that's a moving target in terms of using cash to buy back stock or pursue acquisition opportunities, depending on where your stock is trading essentially.

I think it is where we -- really we can drive the best value for shareholders.

That's not that the M&A is at the top of the list versus anything else.

It's where is -- where can we -- what strategy or what tactic is best at this point in time to drive value for shareholders -- long-term value for shareholders and we look at every acquisition opportunity.

And as you may or may not be aware, we have turned down more access lines in the last three years than we've -- then we've purchased in the last five years really or the last six years.

So we have a very disciplined approach to acquisitions.

We think they can drive shareholder value and in excess of what we can do buying our own stock then we certainly will pursue that.

If not we will continue in the strategy we have put in place and had in place the last couple of years in using our free cash flow to buy back stock.

Thank you.

Our next question comes from Thomas Seitz from Lehman Brothers.

Yes, thanks, good morning.

Can you maybe walk us through a little bit more on the access line losses?

Whether or not they are at all geographic -- geographically concentrated.

Some of the competitors speak to specific markets as to why access lines -- access lines may or may not have accelerated and I was wondering if you could, at all, point to, you know, specific geographic markets where there might be a younger population moving to wireless, or a higher demographic in terms of income that might be using high-speed data, et cetera, et cetera?

Thanks.

Tom, Karen Puckett.

In general it's pretty much across the board like I said earlier in our competitive markets and in our noncompetitive markets where we don't have facility based.

When you look at the college exchanges, it is a bit hotter in terms of inward demand being down.

Meaning every year there is less and less students moving back in that go for a wireline phone.

They are just taking a wireless phone.

But -- but you can't speak with anything really specifically?

It is pretty much across the board for you guys?

Right.

It is pretty much across the board and we look at that in many different ways, yes.

Okay, thank you.

Our next question comes from Simon Flannery from Morgan Stanley.

Okay, thanks very much.

Good morning.

On the stock buyback.

Where are we with the equity units in terms of time frame that you think that that will be completed?

And any adjustment to the, sort of the payment given where the average price they purchased it is versus where that was eventually set at and how that might work at.

And then in terms of when would you consider sort of putting out a new stock repurchase power in terms -- to replace the existing one.

Thanks.

Good morning, Simon.

The -- the 12.9 million shares under the ASR were -- the original price was $32.34.

Through yesterday, I guess we had repurchased about 10.6 million shares, and the average price was $34.50.

So we have about 2.3 million shares to go.

Of course, depending upon the average daily volume, that's going to determine the number of shares we can -- or the banks can repurchase each day, but currently, I guess, we would anticipate the program being complete sometime in the middle of December.

In terms of the true-up that we will be obligated to -- or settlement that we'll have to make with the investment banks.

If at the -- if the current average holds true, $34.50, the settlement would be about $28 million, and we would have to decide at the end of the process as to whether we want to make that in cash or shares.

And we have not made that decision at this point.

So somewhere between 25 and $28 million probably in terms of the settlement that we will need to make.

Okay.

And in terms of buyback plans beyond the $200 million program?

We -- it just depends on the use of -- our best use of free cash flow, Simon, what we end up with.

The Board -- we discuss that with the Board on a quarterly basis.

We look at, of course, stock buybacks, dividends, other opportunities to utilize our cash.

But that has been our policy the last couple of years that -- that we believe it has been a good strategy for us thus far.

Good, thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Michael Rollins from Citigroup.

Hi, good morning.

I had a quick question for you on the residential side of the business.

If you look at the residential revenue for what customers spend, local, LD, the CLEC.

What would be the blended ARPU today for those customers based on all the varying penetration rates of different features and services, et cetera?

Thanks.

The average for all of our customers -- I don't really have it broken down between residential and business, but, again, most of our business customers are fairly small -- small businesses.

But the average per access line is between 65 and $66 per month.

Is that what -- out of the customers' pocket or -- so, in other words, if you look at what the average bill might be per month is there a way of understanding what that might be on the fully blended basis?

That's basically what that is.

That's the average bill revenue per month.

Great, thank you.

That's with the -- I guess that's the local exchange business to the extent that one of those customer may also be a long distance customer of ours or have an Internet service with us.

That would -- you would have to add to that.

Yes, basically with -- you look at it from the marketable revenue being the DSL and the LD and then the basic with the CLEC is the out-of-pocket spend for the customer and it's about -- probably on average about $50 per access line.

So the blended number is about $50 per line?

In terms of customer spend, not build.

But customer spend per access line.

Right, because--.

Basic and marketable revenue which we would consider features, LD, DSL, the products that we would sell to them that aren't the regulated revenue.

Okay, great, thank you.

Our next question comes from Christopher King from Legg Mason.

Good morning.

Just had a couple of quick questions for you regarding phantom traffic, which we have been hearing a lot about over the course of the past couple of weeks.

Just was wondering, we always hear the number that roughly 20% or so of a lot of RLEC's traffic does seem to be phantom traffic at this point.

I was just curious as to what CenturyTel might be looking for the FCC to do on that?

In other words, what would be your ideal solution going forward, and how important is that to the intercarrier compensation proceeding.

And then lastly if I could, could you give us a ballpark figure if you were able to -- if for some reason you were able to recover all of your phantom traffic -- can you give us a ballpark of the revenue that we might be talking about?

This is Karen Puckett.

In terms of the phantom traffic.

The 20% is -- the range is 15 and some RLECs will say it's 30.

We are working with a lot of the RLEC community.

We have been together to visit Chairman Martin.

He is very interested in it.

We do think it is the right tactical next step to intercarrier comp.

It makes sense to be able to bill for all the minutes of use before we get into what the prorate discussion is.

And what we would like from the FCC is some sort of truth in labeling act where there is implications for carriers who aren't marking their traffic or routing them inappropriately.

I think we are making traction there.

I think he is very interested.

I think the state PEC are very interested so we feel like we are making traction as a group.

In terms of what the number will be I wouldn't venture to say right now what that aggregate number would be.

Thank you.

This concludes our Q&A session.

At this time, I would like to turn conference back over to Mr. Glen Post for any closing comments.

Thank you.

In closing, CenturyTel achieved strong results during what continued to be a changing and challenging industry environment.

During the quarter, we made good progress in diversifying our revenue streams with the addition of the KMC markets which performed in line with our expectation and we believe we are positioned to continue to drive growth in our broadband and fiber transport businesses in the months ahead.

We also remain focused on delivering our customers additional services such as DVS, switched digital television, and wireless which further enhance our bundle offerings.

We are focused on utilizing our strong cash flows to drive growth and deliver long-term value for our shareholders.

Thank you again for participating in our call today and we look forward to speaking with you in the weeks ahead.

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

This concludes the program.

You may all disconnect and have a wonderful day.