Lumen Technologies Inc (LUMN) 2007 Q1 法說會逐字稿

Welcome to CenturyTel's first quarter 2007 earnings conference call.

(OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr.

Tony Davis, Vice President of Investor Relations.

Mr.

Davis, you may begin.

Thank you.

Good morning, everyone, and welcome to our call today to discuss CenturyTel's first quarter 2007 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 they pertain to guidance for second quarter and full-year 2007, 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 May 9, 2007, and accessible for webcast replay through May 24, 2007.

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 May 3, 2007, 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.

We appreciate you joining us today as we discuss CenturyTel's first quarter of 2007 operating results and our guidance for second quarter and full year 2007.

CenturyTel achieved solid financial and operational results during the first quarter.

Diluted earnings per share excluding nonrecurring items was $0.68 for the quarter, or $0.03 ahead of the upper end of our previous guidance, and $0.05 above First Call consensus of $0.63.

Operating revenues for the quarter were nearly $601 million which was at the low end of the expected revenue range that we previously provided.

However we experienced strong data revenue growth of more than 15% year-over-year driven by more than 127,000 high-speed Internet subscribers added during the last 12 months.

Additionally, excluding prior period adjustments we achieved fiber transport and CLEC revenue growth of approximately 11% year-over-year driven primarily by increased demand for fiber transport services.

These revenues increases were more than offset by anticipated revenue declines attributable to access line declines and lower access revenues along with lower revenues associated with changes to the terms of our satellite TV agreement effective January 1, 2007.

Our employees continue to do an excellent job of controlling costs in our business which is a key to our success, given the increasing competition in our industry.

Operating expense came in well below our expectation which was a major factor in our stronger than anticipated earnings per share performance for the quarter.

We also generated strong free cash flow of nearly $157 million during the quarter.

From an operational perspective we did a good job of limiting access line losses while achieving excellent results in broadband customer growth.

We experienced access line declines of approximately 23,900 lines in the first quarter, return, and that's a 19% improvement sequentially and less than a 7% increase for first quarter 2006 line losses.

We continue to believe that the success of our competitive bundle offerings in the marketplace especially our broadband bundles increase customer stickiness and result in lower access line churn.

Excluding one-time adjustments during 2006, our year-over-year line loss was 4.9%.

Again, at the lower end of full-year line loss guidance of 4.5% to 6%.

Demand for broadband services was very strong during the quarter as we added nearly 44,000 high-speed Internet customers.

This represents approximately 12% sequential growth in broadband customers in one quarter while year-over-year broadband customer growth was 44.4%.

As I mentioned a moment ago, broadband service is a key component in our bundled service offerings and we believe it helps reduce access line churn over time.

From an overall bundle standpoint, more than 31% of our residential customers are now served through one of our bundle offering up from 24% a year ago.

Before turning the call over to Stewart I want to give you a brief update on the Madison River Communications acquisition, along with a few other items.

As you know we completed the acquisition of Madison River on Monday this week.

We believe Madison River is an excellent strategic fit with CenturyTel's existing operations and we look forward to integrating their operations into CenturyTel during the remainder of 2007.

The Madison River acquisition increases CenturyTel's access line base by more than 8% adding approximately 170,000 access lines which are nearly 100% broadband-enabled with a high penetration of broadband customers.

Additionally the acquisition includes access to a 2400-mile fiber network located in the south -- Southeastern U.S.

which we will operate as part of our LightCore network.

We continue to expect to achieve about $17 million in synergies over time with additional potential cost savings which we have not quantified at this time from moving transport services currently purchased from third parties in Illinois and Alabama on to CenturyTel's LightCore network as contracts with those third parties expire.

Additionally, we recently restructured the terms of our satellite TV agreement to be more in line with our current peer company DBS agreements in the industry.

This change results in lower revenues and lower related costs.

The net result of which is slightly accretive to operating cash flow.

We continue to believe that satellite television is the best video solution in many of our markets, particularly those with less access line density.

Additionally, we continue to move forward with our IP TV trial in Columbia, Missouri, providing service initially to only a small portion of the market.

Our work there is on track though to increase the coverage area to about 85% of the market by year end.

Finally, CenturyTel continued to return significant cash to shareholders during the first quarter as we utilized nearly $164 million to purchase and retire approximately 3.7 million shares of common stock and we paid cash dividends of approximately $7 million.

At the close of business yesterday we had approximately $80 million remaining under our $1 billion share repurchase program which we currently expect to complete by June 30 of this year.

With that, I will turn the call over to Stewart to provide additional detail on our results for the fourth quarter and to update you on our financial guidance for 2007.

Thank you, Glen.

During the next few minutes, I will cover some of the highlights of our first quarter 2007 operating results, then I will spend a few minutes discussing CenturyTel's capital structure and liquidity, including comments regarding first quarter 2007 and updates as of April 30, following the close of the Madison River acquisition.

I will then conclude my comments this morning with a discussion of second quarter and full-year 2007 guidance provided in our earnings release issued earlier today.

As a reminder, all the comments regarding the actual results for first quarter 2007 and 2006 exclude those nonrecurring items detailed on the financial statements accompanying the press release.

For first quarter 2007 operating revenues decreased to $600.9 million, down 1.5% from $610 million in first quarter a year ago.

Voice revenues for first quarter 2007 were $209.1 million versus $217 million in first quarter 2006.

This decrease in voice revenues was primarily driven by revenue declines associated with lower access lines.

Network access revenues were $211.4 million versus $224.2 million in first quarter 2006.

This $13 million decline resulted primarily from lower interstate revenue requirements as a result of decreased expenses and a decline in the achieved rate of return and lower intrastate minutes of use.

Data revenues, which include our high-speed Internet revenues, increased more than 15% from 83.1 million in first quarter a year ago to 95.9 million in first quarter of 2007, primarily driven again by strong high-speed Internet customer growth during the last 12 months that more than offset revenue declines associated with lower special access revenues.

Fiber transport and CLEC revenues increased more than 7% to $38.3 million in first quarter this year from $35.8 million in first quarter a year ago due to growth in our fiber transport business.

Other revenues were $46.2 million compared to $49.9 million in the first quarter 2006.

This decrease was primarily driven by lower satellite video revenues due to the change that Glen mentioned in the terms of our DBS agreement effective January 1, 2007, and lower directory revenues.

Operating expenses declined 3.2% from $447.2 million in first quarter 2006 to $432.8 million in first quarter of 2007.

This decline in operating expenses was primarily driven by lower personnel related costs due to workforce reductions in 2006, lower marketing information technology and bad debt expenses, lower depreciation expense associated with fully depreciated assets, and lower satellite video expenses due to the change in the terms of our agreement effective again the first of this year.

Which more than offset increased expenses associated with the growth in high-speed Internet customers and our fiber transport business.

Our operating cash flow for the first quarter of 2007 was approximately $296 million or slightly less than the $298 million reported in first quarter of 2006, and for first quarter 2007, we generated an operating cash flow margin of 49.2% compared to 48.8% in first quarter a year ago.

This margin increase was primarily driven by our success in containing cash expenses in this challenging revenue growth environment.

Operating income for first quarter of 2007 was $168 million, a 3.3% improvement over first quarter 2006 operating income of approximately $163 million.

This increase was due to the lower depreciation expense discussed a moment ago.

Net income for the quarter was $77.9 million compared to $72.3 million in first quarter of 2006.

We added nearly 44,000 high-speed Internet customers during the quarter and ended the quarter with nearly 413,000 high-speed Internet customers or nearly 25% penetration of our DSL-enabled lines.

Turning to our capital structure, as of March 31, 2007, CenturyTel's debt-to-equity ratio was 1.1 to 1, and net debt to annualized first quarter operating cash flow was 2.1 times.

As mentioned earlier, CenturyTel completed the acquisition of Madison River this past Monday, April 30, which changed CenturyTel's capital structure modestly.

We issued $500 million of 10-year 6% notes and $250 million of six-year 5.5% notes in late March to fund the majority of the purchase price.

Including the Madison River acquisition, we currently expect to end 2007 with net debt to operating cash flow in line with our previous guidance of 2.6 times.

So we believe CenturyTel remains financially well positioned with a solid balance sheet, continued strong cash flows, and excellent liquidity to complete the remainder of our current $1 billion share repurchase program by the end of the second quarter as well as meet competitive pressures in our markets and execute our growth in divestment strategies in the future.

Finally, I would like to discuss the second quarter and full-year 2007 guidance provided in the press release this morning.

Let me begin by reminding you that our guidance excludes any nonrecurring items that may occur in the second quarter and remainder of 2007.

Additionally, second quarter guidance and full-year 2007 guidance excludes the Madison River acquisition and a one-time $49 million positive pretax settlement of litigation related to network access disputes that occurred in the second quarter.

This settlement has no relation to the anticipated positive revenue settlements that we previously communicated in our February guidance for 2007.

As a confidentiality agreement was part of this second quarter settlement, we cannot provide any further details on this issue.

Regarding Madison River, excluding one-time severance and integration costs, estimated to be approximately 7 million to $10 million, we expect the acquisition to be slightly accretive to both free cash flow and diluted earnings per share for 2007.

Finally, second quarter and full-year 2007 guidance includes all shares repurchased through April 30, but does not include the impact of any share repurchases that are made after that date.

For second quarter 2007, we anticipate revenue -- total revenues in the range of 600 million to $610 million.

We expect diluted earnings per share for the second quarter 2007 to be in the range of $0.62 to $0.67 with the decline from first quarter primarily due to the following items.

Annual wage adjustments that become effective in the second quarter, anticipated higher marketing expenses, and the seasonal impact of outside plant maintenance activities that we see every year.

For full-year 2007, we expect diluted earnings per share to be in the range of $2.75 to $2.85, an increase over our previous full-year 2007 diluted earnings per share guidance of $2.60 to $2.70, primarily due to the following reasons.

First quarter actual results exceeded our expectations.

Share repurchases completed after January 31, 2007, and the expectation that expenses for the remainder of 2007 will be lower than originally anticipated when we gave our 2007 guidance.

Finally, we continue to expect 2007 capital expenditures, excluding Madison River, to be approximately $325 million.

That concludes my prepared remarks for today.

So, at this time, we'll turn the call back to the operator to provide further instructions for the question and answer portion of our call.

Thank you, sir.

(OPERATOR INSTRUCTIONS) First question comes from Mike McCormack from Bear Stearns.

Hi, this is David Frank for Mike McCormack.

I just have a few questions.

First, can you talk a little about CapEx in the quarter?

It was down year to year and got lower than we had expected.

Would it be fair to assume that we're going to see a pretty good ramp over the remainder of 2007?

Then, second, just wondering what contributed to your great quarter of DSL adds.

Was it increased promotional activity on your part or was it a lack of voice expansion by the cable guys?

Thanks.

David, regarding our capital expenditures, yes, we would expect the capital expenditures to ramp up during the year.

Normally first quarter is our lowest quarter of the year due to weather issues in the north.

We would expect that to pick back up in the second quarter for the remainder of the year.

Regarding DSL rollout, we had a promotion we started in the fourth quarter, continued in the first quarter, 12 months at discounted prices.

We had saw slight increase in VoIP rollout, 29% of our access lines to 31% during the quarter but no major increase.

We just see a lot of strong demand and we're marketing our bundles aggressively.

It's been very successful.

Thank you.

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

Hey, guys, thanks.

Just a couple questions.

First would be, just if you can give us any color on the Madison River operations in the Q and what you're inheriting and taking control of now versus what you expected?

Second would be just on the -- that's my first one.

David, so far everything we expected Madison River has been pretty much on -- in line with our expectations.

We -- they have a good operation there, good broadband penetration, 100% broadband capability in their network so thus far no surprises.

We feel good about where we are there.

Can you speak to the line loss trend they saw in the quarter?

Not really.

It's about what we expected.

We expected about 170,000 access lines or so when we picked it up, and that's about where they are.

Just on the network access side it was down year-over-year I guess we were expecting some incremental amount of compression there.

Is this a good level to expect will be kind of the run rate for the balance of the year or is there kind of a stepdown coming?

Yes, we'll -- David, we'll continue to see network access revenues trend down somewhat during the year, primarily due to the intrastate access revenues, and depending upon our ability to control expenses, interstate as well possibly.

But no major big shift incrementally from the U.S.

F side?

No major big shift and we still expect our universal service revenues to be as we've discussed on the last call about -- there was a little over -- a little over $40 million this quarter, and we expect that to remain about the same during the rest of the year.

Okay.

If I could just, this is the last one, the classic question, obviously if you get to the end of the buyback, there's obviously the big choices of incremental M&A or buybacks or things like that.

Given that you will be in the integration phase with the Madison River acquisition, is it maybe fair to say that if there is cash usage at the margin it's kind of more incremental buybacks than de-leveraging given your comfort level with the rating agencies now and then M&A?

Could we rank-order them in that way?

I'm not sure we could exactly rank them in that way.

We certainly like the strategy of buying back stock while maintaining our investment grade credit rating, so we'll continue that mode.

In August the Board will meet and we'll decide just how aggressive we want to be or if we want to continue the stock buyback, but it's been a strategy that's work well and we continue to like that.

Thanks, guys.

Our next question comes from Simon Flannery from Morgan Stanley.

Good morning.

Following up on David's question, the 2.6 times leverage for the year end are you assuming that most of the cash flow for the rest of the year is then used to pay down debt to get to that number?

Can you just give us an update on where you are on wireless and given what AT&T has been doing with U-verse, have you changed your views in terms of the feasibility of IPTV beyond your trial markets?

Thanks.

First of all, Simon, we haven't really disclosed our assumptions in that 2.6 times but there is some buyback assumed in there, even though we're going to the 2.6 times leverage as a target there.

We could see some buyback there and still meet the 2.6 times.

Okay.

And would you repeat the second question?

It was -- update on the wireless initiatives and also on IP TV, any change to your sort of thoughts about feasibility in some of your larger markets?

Okay, regarding the wireless service, we currently offer wireless service through MVNO arrangements in about 30% of our access line market.

Our focus is primarily on broadband data now.

We continue to have talks with wireless carriers but it's very difficult to negotiate agreements that are really economically attractive or feasible in some cases.

We will continue to seek ways to bring wireless to our customers but our primary focus in the coming months is going to be -- really be on broadband data.

Regarding IP TV trials, we have not conducted any trials or any service beyond our two trial markets, Lacrosse, Wisconsin, and Columbia, Missouri.

And any sort of impact are you seeing any sort of improvement in the economics there or--?

We are seeing prices come down.

Every few months there's another price reduction, and we feel better about the technology as we continue to trial it there.

We -- again, we're trialing the Alcatel Microsoft technology in Columbia, Missouri now, it's working well.

Same technology that AT&T is using.

We only have a very -- about 20, 30 customers today.

We expect that to accelerate in the summer, and by year end we expect to serve about 85% of that market.

Great.

Thank you.

Our next question comes from Richard Klugman from Prudential.

Thanks.

Good morning.

You gave guidance without Madison River.

Is that something we can expect on the next quarterly call, that it will be including it or pro forma?

Yes, good morning, Rich.

We will, at the -- in our third quarter guidance we will give guidance on, including Madison River at that point.

Since we just closed on Monday and are getting in there and still putting our transition plans in place we didn't feel like it was appropriate to really give guidance including Madison River at this point other than to say that, it's really like we expected or like we discussed when we had the call associated with announcing the acquisition.

Great.

And the satellite changes that you made in -- could you just go over that a little bit more and maybe give us a sense as to when you anticipate perhaps some incremental disclosure there more in line with some of your peers that tell us subscribers and penetration and so on?

Well, the real change is, Rich, we were in a resale situation, agreement with Echostar, and we changed that back to an agency agreement, primarily because the margins are very slim there.

And we believe we're better off long-term with an agency agreement versus the resale agreement.

Also, they changed the way that, from the initial proposal by them was to not allow direct contact with the customer if you were an agent.

They changed that subsequent to our agreeing to the resale model, and so that still enables us to control the customer relationship while serving as an agent.

So this is very similar, I remember AT&T had that issue originally with Echostar as well, where they had more of a holistic bundle, and then backed off from that to avoid having the CPGA cost.

That's essentially what you're saying?

That's true except they had a little different issue.

They were also owning the CPE, AT&T owned the CPE, and that was causing them some substantial losses.

We did not have ownership of the CPE.

Our impact was less per customer than theirs was.

Now that it's a more economically viable way of approaching it, I assume this is something you're going to try and sell more broadly and perhaps let us in on how many subscribers you have in a given quarter going forward, hopefully.

We'll probably be more in line with our peer companies going forward with disclosure, that's correct.

Thanks a lot.

Our next question comes from Chris King from Stifel Nicolaus.

A couple of quick questions for you.

I know you guys are trying to stay away from giving any guidance with respect to Madison River but just wanted to assume that add least in terms of your consolidated CapEx numbers for 2007, that any investment in a capital plant in the Madison River properties would be fairly minimal, at least on a consolidated basis.

Secondly, I believe Madison River had some NOLs.

Just wanted to double-check and see if that would have any impact on your either book tax rate or cash tax rate going forward?

Chris, the total impact on the CapEx will be minimal because basically we'll just kind of finish out at the run rate that those guys were going at, and when we picked them up.

So that will be pretty minimal.

The NOLs, if they had NOLs, we bought a subsidiary of the parent company that owned the telephone -- the telephone company, so if there were NOLs, they were at the parent company level, so we didn't pick up anything there.

Thanks.

One last quick question on phantom traffic.

Just wanted to get a quarterly update from you in terms of any movement in Washington on that front.

Chris, Karen Puckett.

We're just still encouraged that the FCC and Martin will do something yet this year in terms of phantom traffic hopefully mid-year.

Thank you.

Our next question comes from Michael Rollins from Citigroup.

I was wondering if you could quantify the transitory access benefit that's moving through the year.

How much was in the first quarter, and then how that moves in the subsequent quarters that would be great.

Mike, I'm not exactly sure what you're asking.

Well, you talked about the transitory benefit to earnings and revenue that you're going to get from the -- there's a couple of access settlement benefits you talked about.

One of them you put in your guidance previously.

And I was wondering how much of that was specifically in the first quarter versus moving through the rest of the year.

Actually, none of that was in the first quarter, and the amount that we disclosed in the last quarter guidance for the full year we expect all of that to occur in the third quarter.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from Sal Muoio from SM Investors.

Any thoughts on the 700-megahertz auctions that are coming up?

You've talked before about opportunities related to Wi-Fi and Wi-MAX, and just how you might see yourself positioning yourself to supply those kind of services.

Yes, Sal.

We are talking with other companies about possible bidding [assortiums].

We're still waiting really on the FCC to finalize how the spectrum will be divided for auction purposes.

We'd like to see smaller geographic areas defined for ownership opportunities.

We like the propagation characteristics of the spectrum, particularly for wireless voice.

To really be viable for video, or big data applications, you will need about 12-megahertz of contiguous spectrum, possibly more, which could be real expensive, but we like the spectrum and are looking at possibilities there, but we don't -- we wouldn't expect to be looking at nationwide, huge regional-type footprints.

We think it's going to be too expensive for us to do that.

So essentially you want, like everyone else you want small bite-size pieces so you can overlay certain markets.

That's correct.

Okay.

Thank you.

And our last question for today comes from Mr.

Richard Klugman from Prudential.

Thanks.

I just wanted to ask you a follow-up, Karen, on what you're seeing with access line trends on the inbound and outbound.

You've talked about that in the past, and I was wondering if there was any improvement in the ratio in terms of, fighting back against cable taking some of the inbounds.

We reported a 23,900 loss, and the breakup pretty consistent, what we see 73% of that was residential primary, and 14% second lines, and business was about 13% of the loss.

From an inward standpoint we do continue to decline on our inwards 9%.

Now, that's down from some prior year 24 months where it was in the high teens, so we do see some improvement inwards, but we're still down.

Our outs are definitely improved.

Glen reported we had increased competition from VoIP at 31%, and our total outs declined about 8.6%.

So again, improvement in the outs.

Reported numbers are about 6.9% of our total outs, and that's about -- we were about 5.7 first quarter of '06.

I'm sorry, 6.9 from--?

6.9 of our total outs are ports.

You said that changed from--?

Last -- year-over-year first quarter 2006 it was about 5.7%.

Okay.

So that's -- if that's going up, that would imply--?

The increased competition.

Right.

From having a more geographic development of cable?

Correct.

I think it's fair to say that when a competitor launches a market, for the first six months we see a bit of increase in activity, and it tailors off after first the first six months, and it begins to stabilize.

That's helpful.

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 are pleased that CenturyTel began 2007 with a solid first quarter.

We generated strong cash flows, excellent broadband customer growth.

We remain focused on driving broadband growth across our markets while continuing to evaluate additional product and service offerings to better serve each customer segment within our business.

We do believe that CenturyTel is well positioned to meet the challenges and take advantage of opportunities as they arise in the months and years ahead.

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

Thank you.

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

This concludes our program for today.

You may all disconnect, and have a wonderful day.

Thank you.