Lumen Technologies Inc (LUMN) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to CenturyTel's third quarter 2006 earnings conference call.

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

Later, we will conduct a question-and-answer session, and instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded.

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

Mr. Davis, you may begin.

Thank you, Sayid.

Good morning, everyone and welcome to our call today to discuss CenturyTel third quarter earnings results released earlier this morning.

During today's call, we will refer to certain non-GAAP financial measures, and we have reconciled these measures to GAAP figures in our earnings release, which is available on our Website at www.CenturyTel.com.

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

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

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

We will be making certain forward-looking statements today, particularly as they pertain to guidance for fourth quarter and full-year 2006, selected information regarding 2007, 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 November 8, 2006, and accessible for Webcast replay through November 22, 2006.

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 November 2nd, 2006, and should be considered valid only as of today, regardless of the date listened to or reviewed.

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

Thank you Tony.

Sure appreciate you joining our call today as we review CenturyTel's third quarter 2006 operating performance, and discuss with you our outlook for the remainder of 2006, along with a few insights for 2007.

CenturyTel achieved solid financial results during the quarter, with operating revenues including nonrecurring items of more than $619 million, which exceeded the upper end of our previous revenue guidance for the quarter.

Diluted earnings per share excluding nonrecurring items of $0.66 for the quarter, was $0.05 ahead of the upper end of our previous guidance, as well as $0.05 above First Call's Consensus of $0.61.

This solid revenue performance was primarily due to growth in data revenues, driven by strong growth in high-speed internet subscribers during the last 12 months.

Additionally, we continued to experience increased revenues from customer growth and expansion in our LightCore division.

Finally, our wireless and video initiatives also contributed to revenue growth during the quarter.

Additionally, our employees did a good job of containing costs in our business during the quarter, which along with higher than expected revenues drove the higher than anticipated EPS performance.

We generated strong free cash flows as we delivered over $125 million of free cash flow during the quarter.

Also customer response to our bundling offerings remains strong, and DSL and long distance bundles continue to have a positive impact on churn in our business.

During the third quarter, we added nearly 28,500 total bundles representing more than 6.5% of sequential growth, and over 34% growth for the nine months ended September 30th.

Simple Choice customers now represent 27.5% of our residential access lines, as compared to just 18.5% a year ago.

We also added more than 27,000 high-speed internet customers during the quarter, driven by strong demand for broadband services.

Earlier this year, we communicated that while CenturyTel has experienced solid growth in long distance lines during the past several years, we expected the long distance growth to slow during 2006 and beyond, due to the level of our long distance penetration at year end of 2005.

However, during the first quarter this year, we lost unlimited long distance bundles to a number of our markets, which gave us additional growth in long distance penetration, with nearly 19% of our residential customers having unlimited voice services as of September 30 this year.

At the end of this quarter, overall on business penetration has reached 56.4%.

While we continue to review long distance services as an important part of our overall suite of products and services, we experienced minimal growth in long distance lines during the third quarter.

We expect further growth in long distance service to be challenging in the future as well.

From an access line standpoint, we experienced access line losses of approximately 29,000 during the quarter, resulting in a year-over-year line decline of approximately 5%.

Additionally, we made the decision this quarter to remove approximately 24,000 test lines from our access line count, and we recorded a 9,000 positive line adjustment related to database conversion and clean up during the quarter.

Before turning the call over to Stewart, let me give you a brief update on a few other items.

First as announced in July, CenturyTel made a $59 million deposit with the Federal Communications Commission to participate in the AWS auction.

We expected to participate in the auction only to the extent that spectrum prices were at levels that offered excellent return on investment opportunities, and in areas where we could overlap our operating areas.

In late August, we discontinued bidding in the auction, as we concluded we would not be able to secure a meaningful spectrum position in and around our service areas, and we received a $58.5 million refund from the SEC in late September.

We have now finalized our plan to go to the 6 AWS license covering nearly 630,000 pops we did acquire in the auction.

Also, we continue to evaluate broadband wireless technologies, including Wi-Fi and Wi-Max as potential growth opportunities for CenturyTel in the future, and will continue to look at those in the months ahead.

Turning now to Video Services for a moment, we continue to view video as an important product in our overall products and service portfolio.

Our switch digital television offering in portions of La Crosse, Wisconsin market continues to perform well, and we continue to gain valuable knowledge and experience around this product offering.

Additionally, we have completed the construction of our video head-in in our second trial market, Columbia, Missouri.

We plan to begin offering video service to limited portions of this market in early 2007.

Also want to briefly mention and comment on CenturyTel's shareholders rights plan that expired yesterday, November 1st.

Management and the Board have discussed the Rights Plan, and at this time have chosen to not extend or renew the plan.

We believe in the value of the rights plan in preserving shareholder value, but we do not believe it is necessary to renew the plan at this time.

Additionally, CenturyTel continues to return cash to shareholders during the third quarter, as we returned more than $100 million through a combination of accelerated share repurchase settlements, cash dividends, and additional share repurchases.

Finally, we currently anticipate completing the remainder of our $1 billion share repurchase program by June 30th, 2007.

With that, I will turn the call over to Stewart to provide additional details on the results for the third quarter and to update you on our financial guidance for fourth quarter and full-year 2006.

Stewart?

Thank you, Glen.

I will begin my comments by discussing the highlights of our operating results for third quarter 2006, then I will briefly review our capital structure and liquidity, and conclude my comments with a brief discussion of the guidance provided in our earnings release issued this morning.

As a reminder, all comments regarding actual results exclude those nonrecurring items detailed on the financial statements that accompany the press release.

For third quarter 2006, operating revenues decreased to $619.4 million, which was down 5.7% from $657.1 million in the third quarter a year ago.

This year-over-year decline in operating revenues was primarily due to $32.2 million of lower prior period revenue settlements in third quarter of 2006, than in third quarter of 2005.

Excluding prior period revenue settlements, operating revenues declined less than 1% year-over-year.

Voice revenues for the third quarter 2006 were $216.2 million versus $225.9 million in third quarter 2005.

The decrease in voice revenues is primarily driven by access line losses and lower average long distance rates, which were partially offset by growth in average minutes of use.

Network access revenues were $219.3 million versus $257.6 million in third quarter of 2005.

This $38.3 million decline resulted primarily from the anticipated lower Universal Service funding revenues, lower intrastate revenues, and profit revenue settlements in 2006 being lower than those in 2005.

Data revenues increased 2.8% from $88.9 million in third quarter of 2005, to $91.4 million in the third quarter of 2006, primarily driven by strong, high-speed internet subscriber growth.

Fiber transport and CLEC revenues increased to 3.1%, to $37.5 million in third quarter 2006, from $36.4 million in third quarter 2005, primarily due to the growth in our fiber transport business.

Our operating expenses for the quarter were $447.6 million, or $2.4 million less than the $450 million in the third quarter of last year.

Our operating cash flow from the third quarter of 2006 was $301.6 million, compared to $340.6 million in the third quarter 2005.

And for the third quarter of 2006, we generated operating cash flow margin of 48.7%, compared to 51.8% for third quarter of 2005.

This margin compression, which was anticipated, was primarily driven by the lower prior period revenue settlements previously mentioned.

Additionally, access line losses and lower USF and access revenues, along with growth in lower margin services along with high speed internet, fiber transport, and CLEC, impacted margins year-over-year.

Operate income for third quarter of 2006 was $171.8 million, and net income was $78.1 million.

Long distance line penetration as a percentage of total access lines was 56.4% at the end of the third quarter of this year, versus 50.8% at the end of the third quarter 2005.

We added more than 27,000 high-speed internet customers during the quarter, reaching over 340,000 high speed total internet subscribers as of the end of the quarter, or nearly 21% penetration rate of our total DSL-enabled lines.

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

CenturyTel generated more than $125 million of free cash flow during the third quarter, while investing $82.6 million in capital expenditures.

Additionally, as Glen mentioned earlier, in late September we received a refund of approximately $58.5 million of our $50 million AWS auction deposit from the FCC.

From a leverage standpoint as of September 30, 2006, CenturyTel's debt to equity ratio was 0.79:1, and net debt to operating cash flow for the quarter was 2.18 times.

So we believe CenturyTel is financially well-positioned with a solid balance sheet, continued strong cash flows, and excellent liquidity to meet competitive pressures in our markets and execute our growth and investment strategies in the future.

Finally, I would like to briefly discuss the fourth quarter and full-year 2006 guidance provided in our press release this morning.

Let me begin by reminding you that our guidance excludes non-recurring items.

During the third quarter, following the completion of the $500 million accelerated share repurchase agreements which were settled in July, CenturyTel executed a 10B-51 plan effective through October 31, 2006, for open market repurchases of common stock.

Through September 30, we repurchased and retired more than 1.7 million common shares.

Additionally, we repurchased and retired a little more than 1 million shares during the month of October.

Our fourth quarter and full-year 2006 guidance includes all shares repurchased through October 31, but does not include the impact of any share repurchases that may be made during the remainder of the fourth quarter.

For fourth quarter 2006, we anticipate total revenues in the range of $605 million to $615 million.

This is down slightly from the $619 million of revenue in the third quarter.

The decline is related to approximately $4 million of positive prior-period revenue adjustments in the third quarter, and continued expected access line declines.

We expect diluted earnings per share to be in the range of $0.60 to $0.65.

Since fourth quarter is historically our most difficult quarter of the year in terms of access lines, we do expect fourth quarter line losses to exceed third quarter line losses, excluding the one-time adjustments Glen mentioned earlier.

For full-year 2006, we increased and narrowed our diluted earnings per share guidance, which was $2.35 to $2.45, up to a new range of $2.45 to $2.50 for the full year.

This increase in full year 2006 diluted earnings per share guidance, is primarily due to third quarter diluted earnings per share that exceeded our expectations.

I would like to conclude the remarks today with a few comments related to 2007, that will hopefully assist you some in updating your models for next year, since analyst 2007 diluted earnings per share estimates currently range from $2.30 to a high of $2.75.

First of all, revenue settlements related to prior periods are anticipated to increase, and positively impact 2007 diluted earnings per share by $0.17 to $0.22 per share.

This increase will partially offset the impact of anticipated access line losses along with continued pressures on access revenues similar to what we are seeing this year.

Additionally, we expect depreciation expense will decline in 2007, due to certain telephone assets becoming fully depreciated.

I will point out that we expect the net of these three items will be positive to 2007 net income.

This concludes my prepared remarked for today, and we will now open the call for a few questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from Mike McCormack from Bear, Stearns.

Thanks.

Hey, guys.

Maybe you can talk a little bit about the '07 pressures that are going to offset the revenue benefit?

Where are you seeing the incremental competition there?

I know that a lot of carriers are talking about wireless substitution beginning to wane a bit.

Just trying to get your sense on that.

And also for the current quarter, the other revenue line looked like it ticked up a bit.

Just trying to figure out the puts and takes in that revenue line?

Thanks.

As far as the competition and the offsets on the revenue issues, the trends we don't think are going to be really changed substantially into '07.

We are going to see the same trends we've seen this past year, more access line losses, the impact on voice revenues and we will be working to offset that with our broadband offerings, with the DSL revenue and other revenues, our regional fiber operations.

So we don't see a lot of change there.

We will see an increase in the Cable VoIP offering in our markets.

We're at, I think, 24% Cable VoIP coverage today, and then we will see that go up some this next year.

That will certainly provide more challenges for us, but we don't expect the trends to be a lot different than they have been this year from an overall voice revenue standpoint.

Mike, in the increase in the other revenues, about half of that was related to the property adjustments that I discussed that will not be there again in the fourth quarter, and then the other half is basically related to the new initiatives that we have such as our DBS service and wireless service.

Great.

Can you give us a sense for what we should be looking at next year?

We are looking at sort of a flat year-over-year declines, or is it going to be worsening next year?

Mike, we haven't given that information out.

We don't expect it to be substantially worse than this year on the worse side.

It's not going to be substantially worse.

We will be talking about that at the next call.

Great, thanks, guys.

Our next question comes from Philip Olesen from UBS.

Thanks for taking my call.

First on access lines.

Just in the quarter, if you can maybe give what you think was the split of the losses of lines between Cable, VoIP, and wireless and say how that has changed versus second quarter?

And second, more strategically from an M&A perspective, at your last two analyst meetings, it seemed like you thought that there would be some opportunities to be able to take advantage of M&A.

Do you think at current valuation levels that your equity preferences, your stock price represents an impediment to be able to use equity to fund M&A?

Thanks.

Good morning, Karen Puckett.

If you actually normalize our access lines for the test lines and the adjustments, we were at 29,300, which is approximately 5%.

The breakdown has been pretty consistent. 77% of that was residential primary, 15% second lines; and 8% was business loss.

The end words in the residential segment continue to decrease, it was down about 21% year-over-year.

As Glen said, we had an increase in cable competition, VoIP expansion to 24% of our access lines.

And although our outs continue to decline year-over-year, we are down about 5%.

We have seen an increase in our ported numbers.

Our ported numbers were up about 145%, about 3,665. 97% of the increase in those ports went to cable.

We did have a small increase, about 3% increase to wireless.

Our ported numbers equated to about 8% of our outs.

Last year that was about, that number was probably in the range of about 3%.

So there was an increase in the ports out.

We also from a second line perspective, see the success of DSL impacting the inwards on the second line.

We still believe also the driver to the residential primary is the wireless substitution, and we are remaining in 2006 in our range of 4.5 to 5.5.

We still feel very comfortable with our '06 guidance.

Philip, this is Glen.

I'll talk about the M&A question.

First of all, the short answer, I think we can be competitive in our current multiples.

You are probably referring to the higher multiples some of the other companies have who have levered up, and pay a higher dividend.

Certainly we always look at that, when we are in a competitive situation, or an acquisition.

The positive thing for us is we can always lever up and pay that acquisition if we decide that's the best route for our Company, the best way to drive long-term value.

Our position has been, we will continue to buy back stock, we will try to maintain our investment grade credit rating, and keep our flexibility so we can use our cash for different purposes, as well as our stock.

So we are very comfortable with our position to be competitive in acquisition situations, or in seeking new technologies and new investment opportunities that can drive long-term shareholder value.

We will maintain our very disciplined approach with acquisitions, as we have in the past.

And as a follow-up, I appreciate the commentary on the access lines.

On the M&A side, has the landscape changed, in terms of what you perceive to be potential targets or candidates out there?

I know there is constantly talk about lines that may be on or off the market?

From your perspective, do you see attractive opportunities there in today's market?

Well, I think we will see more consolidation in our sector in the months ahead.

I believe that the RBOCs will continue to consider selling rural lines.

It just makes sense for them.

I think those opportunities will continue to be out there from time to time.

It's a matter of valuation and strategic fit from our standpoint, and we'll continue to look at every opportunity, but yes, I do believe we'll continue to have opportunities from an acquisition standpoint.

That's great.

Thanks a lot.

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

Hey, guys, good morning.

Thanks.

Two questions maybe.

First, Glen, maybe taking the other side of the M&A question, is what significance, if any, should we be reading into the decision not to renew the poison pill, recognizing your relative valuation, do you see your guys' and your leverage, do you guys see yourselves as a potentially attractive target?

Are you trying to signal something to the market with this move?

Because I think some people might see it that way.

And the second thing is, Stewart, just on the prior period recognitions and all this one-time stuff.

I am still not totally clear.

So the $0.17 to $0.21, or $0.22 that you are going to see next year, is going to be one-time type of out of period events that are going to be in the revenue, that are going to be over and above the revenue this year, including all the other one-time out of period events that you had this year; is that correct?

Yes, David, that's correct.

That is what we currently expect for next year in terms of prior period revenue settlements.

So if we wanted to get a run rate of the actual underlying business power, we would want to subtract out the equivalent of $0.17 to $0.22 of revenue from our estimates next year, to get what the real earnings power of the business is?

Yes, that's correct.

Okay.

Sorry, thanks.

Glen, on the implications of the --

Yes, David.

First, this is not a signal that we are looking now to sell the company.

Our Board has been very clear and our management team feels the same way, that we believe we can drive value for shareholders as a stand alone company long-term.

Our Board has always considered seriously any, all the options, but we just don't believe that the pill is necessary in today's environment, to protect us from a hostile attack.

That's really what the pill was put in place for, and we don't think it's necessary today for that purpose, and that's why we decided to let it lapse this time.

We are not, in no way indicating that we are now putting our company for sale.

Glen, if I could just follow-up.

When you say it's no longer necessary, do you mean that hostile attack is now a lot less likely, or do you feel like you have other mechanisms in place to protect yourself?

And if so, what are they?

Well, we have other mechanisms in place to protect ourselves, and I think it's -- really I think a hostile attack is less likely than it was some years ago.

That is really the bottom line.

All right.

Thanks, guys.

Appreciate it.

Our next question comes from Frank Louthan from Raymond James.

Thank you.

Just quickly on the revenue settlement, my understanding is with some accounting changes to the last of these four settlements you will be seeing going forward?

Is that correct?

And should we imply that operating income is going to be flat or down, excluding the different items?

And can you give us some idea of the decrease in D&A?

And then lastly, can you give us some idea of what do you think the management insider control is with the super-voting rights shares, and so forth, that you would have, which I guess would be what you are alluding to as adequate mechanisms?

Thanks.

Frank, we will give more detail on our fourth quarter call, but you are correct from the standpoint that the 2007 settlement true-up that we expect is really the last of the true-ups, based on the way we are accounting for our pooled revenues at this point in time.

So that is the last of the substantial true-ups that we will have.

Didn't really catch the question on operating income, and understand exactly what you are asking there?

If you exclude that, with the operating income, are you looking for it to be relatively flat?

You said it would still be positive, but by my calculation, it is a 30 or $35 million true-up, or would than imply that you are still seeing operating income in the 665 million to 670 million range, or would it be below that?

I can't really say right now, but that is positive.

On the negative side, we expect to continue to see access line losses, and the related access revenue loss related to the access lines, as well as access minutes.

On Universal Service at least at this point, we expect that to be fairly flat with next year with this past year, or 2006.

And then on the D&A, we expect D&A to be down next year enough to where the net of those three items, the one-time settlements, the revenue reductions related to the continued access line losses, and access revenues and the positive impact from reduced D&A as a result on assets becoming fully depreciated, wouldn't in the aggregate basically have a positive impact on net income.

So if you add those three together on a net basis, they will be positive to net income.

And really just can't say how much right now, because we're not really ready to give all of our guidance for 2007, but again, we just try to as soon as we know things that will affect next year, we try to let you guys know.

Great.

And on the super-voting rights?

Yes, Frank, the super-voting right shares have about 29% of the vote, or close to it.

Management has very little control over that.

We own some of it, but it's the employees, basically through the [econ] who own the majority of those shares.

And we have several shareholders that have some of those, too, long-term shareholders.

So management does not control that vote.

Great.

Thank you very much.

Our next question comes from Simon Flannery from Morgan Stanley.

Thank you, good morning.

I am wondering if we can take a little bit of a dive into the data revenues.

You have great DSL numbers, up over 50% year-over-year in the customer can.

Can you help us think about some of the ARPU trends around the DSL, and also what's going on with some of the other data items?

Your growth slowed a little bit this quarter, but is this something where we can start to see data reaccelerate to a high single digit type growth rate, 10% if you continue to see the good DSL numbers?

Thanks.

This is Karen.

Relative to the DSL, what we are seeing, there is some ARPU compression going on, but most of our activations are in a bundle.

They go to the 1.5 megabit service, which is $30 in a bundle.

The good news about that, is that our churn rate is down year-over-year, so it's given us better churns.

In terms of the actual data revenue in terms of that number, we do have the positive from DSL, as well as some other products like ethernet and ISDN in our business offering, and then on the downside, we had some compression on special access in particular, some changes in circuits going from intrastate to interstate.

And then we had a decline, a continued decline in our dialed.

But net/net, we are up.

I'm not sure if that answers your question.

I guess it's in terms of some of those pressure points, like special access and dial, at what point does that wash through, and then you can sort of see more of the DSL flowing to the data -- ?

We have actually seen dial like most carriers have a slower decline than we anticipated.

I think that will just be a continuation, but at a slower rate.

And on the special access, I think that we have experienced a large change in some circuits in Alabama, but we will cycle through that here in the next 12 months.

So I think it will flatten out over the next 12 months, Simon.

Okay.

And are you able to sell up.

A lot of other carriers have talked about selling 3 and 5 megs, huge demand for those.

Are you starting to see that as well, 1.5 Meg is fine for the first year or two, but a lot of people want to up their bandwidth?

Certainly.

And we do offer a 3 Meg and a 6 Meg and I think you'll see us put more emphasis on that in '07.

Great.

Thank you, Karen.

Our next question comes from Jonathan Chaplin from JPMorgan.

Good morning, thanks for taking the question.

Great quarter.

Just a couple of quick follow-up questions.

In terms of the EPS benefits that we get next year, is there any way, I know you are loathe to give guidance at this point in the year, but is there any way you can give us some indication of what the reduction in depreciation expense would be?

And then I'm wondering if you can give us a quick update in terms of how much of your access lines have cable VoIP competition today?

And then just to follow-up on Frank's question, are there any other defensive measures in addition to the super-voting rights that remain, I think I seem to remember you guys have a staggered Board as well.

Thanks a lot.

John, I'll get the last two questions.

We have a staggered Board.

You are right.

That is the only mechanism we have in place today.

As far as the access lines with cable competition.

With VoIP competition, we have 24% of our lines have Voice over IP cable competition today. 55% of our lines have cable modem competition, and only 66% that we even have a cable company, 66%.

That's how that plays out.

Stewart, do you want to?

Jonathan, we really aren't ready to give, put a number to what we expect D&A to be for next year.

Other than, we expect it to be down enough to where the net of those three items will be positive to net income.

Okay.

Just to follow-up on the first issue, the 24% VoIP competition, I might have had this gone wrong, but I thought that was 30% last quarter.

No, it was 19% last quarter.

Okay, excellent.

Thank you very much.

Our next question comes from Chris Larsen from Credit Suisse.

Hi.

I hate to beat the proverbial dead horse of the guidance, but I am going to ask it one more time.

If you look at the guidance stripping out the one-times, the $0.17 to $0.22 settlement, it implies core revenue is down about 1.5 to 2% or so?

I wanted to make sure I was doing that math right.

And then as best I can tell, the last one-time settlement was third quarter '05.

I wanted to make sure I was doing that right as well.

And then could you give us the magnitude of the PP&E write-off, ballpark, what that might be?

You are correct, in terms of the last significant prior period adjustment we had was in the third quarter of 2005.

In terms of the PP&E write-off, it's not really a write-off of property, plant, and equipment.

I didn't mean to imply that, I meant --

It's just that we have got some assets becoming fully depreciated and as they do, we discontinue depreciation, and that lowers our depreciation expense.

That's what we expect to happen next year, and provide a positive benefit to earnings.

In terms of your core revenue decline, I have to go back and try to calculate that to see.

I don't really know.

The --

It's about 30 to 40 million, though, the $0.17 to $0.22, implied ballpark in that range, so core would have to be down 1.5% to 2 to sort of offset that.

The PP&E that rolls off, do you know about how much that will wind up being, so we can model that out in D&A?

No.

We'll just give you more next quarter.

Okay.

Thank you.

Our next question comes from Chris King from Stifel Nicolaus.

Morning.

A couple of questions.

Just one more on the prior period adjustments that you guys are going to have next year.

Currently at least working under the assumption that that will be primarily a one-time third quarter type of true-up on the revenue side just for 2007, just wanted to confirm that with you.

Second thing is, cost of services and products expenses ticked up a little bit sequentially in the quarter.

Just wanted to clarify and to see how much of that was tied to your increase in data revenues in the quarter, if you had any way to break that out for us.

And last thing was, maybe Karen if you could comment on the increase in cable competition, or the increase in cable outs, in terms of your access line count, that you were seeing in the quarter, what if any particular region, or any particular cable MSO that that increase was coming from, that would be a big help?

Thanks.

Chris, this is Stewart.

You are correct in terms of the third quarter of '07 as being the quarter that we would expect those prior period adjustments to be booked in.

In terms of cost of services and products, don't know how to clarify what was really related to data revenue, but it wasn't that much.

It was basically pretty well split between the new initiatives, i.e. the DBS and wireless, an increase in our long distance costs, with the increased minutes that we had, as well as an increase in access expense.

Chris.

In terms of cable competition, I would say it's pretty much across the board.

I don't think that their recurring pricing has changed.

We do see a tick up as in the, so the amount of time that they are offering like a discount, so we see their promo expense increasing a bit, and we expect that to continue through 2007.

But there is no one particular cable guy that is being necessarily more aggressive than the other.

Thanks.

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

Hi, good morning.

I just had a quick question on the capital spending.

How do you think capital spending over the next two years should track from this year?

You took a big cut this year, and what are the different projects that you are thinking about that might influence these numbers over time?

Thanks.

Hey, Michael.

The CapEx for this year, we think we can keep and remain in that range the next couple of years.

There are a couple of opportunities that could impact that.

One would be if we decide the video technology, the prices came down, but the technology matured enough that we felt like we could drive really strong returns from those investments.

Today the prices are still too high, at least on parts of the equipment, in the middleware, on the set top boxes, to make it really work financially in a big way, a major rollout.

Secondly, it depends on what happens with broadband wireless, we think there's some opportunities with Wi-Fi, Wi-Max, especially going forward.

But that is still not mature yet.

We will be looking at those in the months ahead.

Those are the two major items we believe could impact our CapEx if those were to materialize.

Thanks.

Our next question comes from Jason Armstrong from Goldman Sachs.

Thanks for taking the question.

Just maybe a couple follow-ups.

Just mentioned Wi-Max as a potential means for growth for the company.

Just wondering, is that still sort of part of the growth strategy, or given the spectrum auction comments, are you sort of limited now?

In other words, might you go after spectrum in the aftermarket to be able to offer that strategy, or is access to spectrum sort of the gatekeeper to be in a law for Wi-Max down the road, or might you try to offer it in unlicensed spectrum, and spectrum wasn't really the limitation?

And second question, again on the M&A front, I'm just sort of wondering here in terms of the size of potential deals, is the focus here still on sort of the home run transformational deals?

That's still the optimal target?

Or you've seen others in the industry chip away with multiple smaller deals, might that be where the better opportunity is?

Just some comments there.

Thanks.

First of all, with the Wi-Max strategy, we are looking at all of our options there.

There are a lot in the industry and a lot of buyers are saying that the unlicensed spectrum will work well.

Our view today, we would be better off with the licensed spectrum, and we are looking at a number of opportunities there, and alternatives and we will continue to look at those, and consider the viability of them.

On the M&A side, we look at both smaller deals and the larger deals, of course.

We believe that we had a few, I think what you like best to have a large deal that would really make a difference for shareholder value, but also that doesn't mean that the smaller deals, mid-sized smaller deals can't drive value.

We will continue to look at those, but we will maintain a very disciplined approach whether it's a large or smaller deal.

Okay, thanks.

This concludes our question-and-answer session for today.

I would now like to turn the conference back over to Mr. Glen Post for any closing remarks.

Thank you.

In closing, we do remain focused on meeting the current and future communication needs of our customers, so we continue to evaluate and enhance our products and service offerings that we have talked about today, and to each customer segment within our business.

Just to reemphasize, we will continue our share buyback in the months ahead, expect to complete our $1 billion share buyback by June of next year, and we will continue to focus on utilizing our strong cash flow to drive shareholder value in the months ahead.

We appreciate you taking the time to participate in our call today, and we look forward to speaking with you in the weeks and months ahead.

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

This concludes our program for today.

You may all disconnect, and have a nice day.

Thank you.