Lumen Technologies Inc (LUMN) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the CenturyTel second quarter 2007 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 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 second 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 though GAAP figures in our earnings release 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 third quarter and full-year 2007 selected information regarding 2007, and other outlooks in our business.

So please review our Safe Harbor language found in our press release, and in our SEC filings, which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements.

Our call today will be accessible for telephone replay through August 8th, and accessible for webcast replay through August 23rd.

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 is current only as of August 2nd, and should be considered valid only as of August 2nd, 2007, regardless of the date listened to or reviewed.

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

Thank you, Tony.

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

CenturyTel's second quarter results reflect our legacy operations in the Madison River properties for two months following the April 30th transaction closing.

Diluted earnings per share excluding nonrecurring items was $0.70 for the quarter, or $0.03 ahead of the upper end of our previous guidance and First Call Consensus at $0.67.

Operating revenues excluding nonrecurring items for the quarter were $639.1 million, with $32.1 million of revenues contributed by the Madison River property.

Excluding nonrecurring items the revenues for the acquired properties operating revenues for the second quarter were $607.1 million, within the range of our previous guidance for the quarter.

We experienced strong data revenue growth of more than 18% year-over-year, driven by more than 130,000 high-speed Internet subscribers added during the last 12 months, that is excluding the Madison River acquisition.

Including the Madison River properties, data revenues increased more than 28% year-over-year.

Additionally, we achieved fiber transport revenue growth of approximately 21% year-over-year, driven primarily by increased demand for fiber capacity to and from smaller cities in the mid-section of country.

These revenue 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 1st, 2007.

Our employees continue to do an excellent job of controlling costs in our business, which remains important to our success in this increasingly competitive landscape, operating expenses came in lower than 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 $154.8 million during the quarter, we experienced access line losses of approximately 29,300 during the quarter, which equates to a normalized loss of 5.2%.

Demand for broadband services remained solid, as we added more than 30,000 high-speed Internet customers during the second quarter.

This represents approximately 7.4% sequential growth in broadband customers during the second quarter, while year-over-year broadband customer growth was nearly 42%.

From an overall bundle standpoint, more than 31% of our residential customers are served through one of or bundle offerings up from a little over 25% a year ago.

From a marketing standpoint we have become focused on differentiating our offers to various customer segments.

We are utilizing primary research, customer data, and front line employee feedback to ensure that we have relevant messages for all of our customer segments.

For example, we have created different message and offers for different lifestyle segments, such as a young family versus a senior couple, and of course on down the line.

From an access line inwards and gross adds standpoint, we continue to expand our distribution channels, such as door-to-door programs and residential developer programs.

Before turning the call over to Stewart, I want to briefly discuss our progress on integrating the Madison River properties, and comment on the completion of our billion dollars share repurchase program.

As you know, we completed the acquisition of Madison River on April 30th.

The integration of the properties into CenturyTel's operations is underway and is moving according to schedule.

We expect to complete the conversion of three of the Madison River properties by the end of 2007, anticipating completing the integration of the fourth property in early 2008.

The Madison River acquisition increased CenturyTel's access lines by more than 8%, adding approximately 164,000 access lines, which is adjusted to conform to CenturyTel's line count methodology, and about 57,000 high-speed Internet customers were added with the acquisition.

We continue to expect $17 million in net synergies, along with additional incremental cost savings over time.

We also repurchased nearly 2.9 million shares of common stock for approximately $136 million during the quarter which completed our $1 billion share repurchase program.

We continue to support returning cash to shareholders, as more compelling uses of cash and not readily available to drive shareholder value, and of course our preference to-date has been to do so through stock buybacks.

Our Board will address the use of free cash flow and the return of cash to shareholders during our meeting later this month.

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

Thank you, Glen.

During the next few minutes, I will cover some highlights of our second quarter 2007 operating results, and spend a few minutes discussing CenturyTel's capital structure and liquidity.

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

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

For second quarter 2007, operating revenues increased 5% to $639.1 million, from $608.9 million in the second quarter of 2006.

Excluding the $32.1 million in operating revenues contributed by the Madison River properties during the quarter, operating revenues declined slightly year-over-year.

Voice revenues for second quarter 2007 were $219.8 million, versus 216.5 million in second quarter of last year.

This increase in voice revenues was primarily driven by voice revenues from the Madison River properties, which more than offset revenue declines associated with lower access lines in our legacy properties.

Network access revenues were 217.2 million, versus 221.7 million in second quarter 2006.

This $4.5 million decrease resulted primarily from lower intrastate minutes of use and lower interstate revenue requirements, as a result of lower operating expenses, a decline in our rate base, and a decline in achieved rate of return.

Such decreases were partially offset by network access revenues associated with the acquired properties.

Data revenues increased more than 28%, from 84.4 million in second quarter 2006, to 108.2 million in the second quarter of this year.

Primarily driven by strong high-speed Internet customer growth during the last 12 months, along with data revenues contributed by the Madison River properties.

Fiber transport and CLEC revenues increased nearly 13% to $40.7 million in second quarter 2007, from 36.1 million in second quarter 2006, due to growth in our fiber transport business and revenues from the acquired properties.

Other revenues were $53.2 million, compared to 50.3 million in second quarter a year ago.

This increase was primarily driven by revenues contributed by Madison River that more than offset lower satellite video revenue, due to a change in the terms of our satellite television agreement, which was effective January 1, 2007.

Operating expenses increased 4.1%, from $443.9 million in the second quarter 2006, to 462.2 million in the second quarter 2007.

This increase in operating expenses was primarily driven by the acquisition of the Madison River properties and growth in high-speed Internet customers, which more than offset lower personnel-related costs due to work force reductions in 2006, lower bad debt expenses, lower depreciation expense associated with fully depreciated assets, and again lower satellite video expenses, due to the change in the terms of our satellite video agreement, which again, was effective the first of this year.

For second quarter of 2007, we generated an operating cash flow margin of 48.7%, in-line with the 48.8% in the second quarter of 2006.

Operating income for the second quarter of 2007 was 176.9 million, a 7.2% improvement over second quarter 2006, operating income of approximately $165 million.

This increase was due to lower depreciation expense discussed a moment ago, and incremental operating income from the acquired properties.

Other income for the second quarter of 2007 was up $3.3 million, primarily due to a one-time positive adjustment to our minority interest participation in a wireless partnership.

Net income for the quarter rose 6.9% to $78.4 million, compared to $73.4 million in the second quarter of 2006.

Our legacy markets added more than 30,500 high-speed Internet customers during the quarter, including Madison River's approximately 57,000 high-speed Internet customers, we ended the quarter with more than 500,000 high-speed Internet customers, or nearly a 27.5% penetration rate of high-speed-enabled lines.

As of June 30th, 2007, CenturyTel's debt-to-equity ratio was 1:1, and net debt to annualized second quarter 2007 operating cash flow was 2.6 times.

As of the end of March 31 of 2007, or the end of the first quarter, these ratios were 1.1:1 and 2.1 times respectively.

As you will recall, CenturyTel issued $500 million of 10-year 6% Series N senior notes, and $250 million of 6-year 5.5% Series O senior notes in late March, to fund the Madison River acquisition.

While the debt-to-equity ratios for the two periods are comparable, the net debt to annualized operating cash flow increased from first to second quarter, due to the closure of the Madison River acquisition on April 30th.

Also on July 12 CenturyTel announced a call for the redemption of its Series K 4.75% convertible senior notes.

Under the terms of the indenture, holders may elect to convert their debentures into shares of CenturyTel common stock versus redeem them, and holders have until August 10th to make their election.

Whether holders elect redemption or conversion, the process is scheduled to be completed on August 14th.

With the expected conversion of the debentures and current forecasted operating performance, we now expect year-end 2007 net debt to operating cash flow to be 2.2 to 2.4 times.

So CenturyTel remains solid from a financial standpoint and with a solid balance sheet.

Additionally, we believe our strong cash flows and excellent liquidity, position us well to meet competitive pressures in our markets, and execute our growth in investment strategies into the future.

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

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

However, third quarter guidance and full-year 2007 guidance does include property revenue settlements we expect to recognize in the third quarter, as previously discussed with you during our last two earnings calls.

We also expect the Madison River properties, excluding one-time severance and integration costs, which are estimated to be 7 to $10 million, to be slightly accretive to both free cash flow and diluted earnings per share in 2007.

Finally, third quarter and full year 2007 guidance are based on shares outstanding as of June 30, 2007, which reflects all shares repurchased pursuant to our $1 billion share repurchase program.

For third quarter 2007, we anticipate total revenues in the range of 690 to $700 million.

We expect diluted earnings per share for the third quarter 2007 to be in the range of $0.87 to $0.92.

This increase from second quarter is primarily due to anticipated revenue settlements related to prior periods, which will positively impact third quarter earnings approximately $0.23 a share.

This item has been included in our 2007 guidance discussions with you since late last year.

For full-year 2007, we expect diluted earnings per share to be in the range of $2.90 to $3.00, an increase of our previous full-year 2007 diluted earnings per share guidance of $2.75 to $2.85, primarily due to second quarter actual results exceeding our expectations, higher than previously anticipated revenue from long distance, and high-speed Internet products, the expectation that expenses for the remainder of 2007 will continue to be lower than our earlier forecast, and share repurchases completed after April 30th.

Finally, we now expect 2007 capital expenditures to be between 300 and $325 million.

We have worked hard to get our telco wireline and capital expenditures in-line with the changing fundamentals of declining access lines and high-speed Internet growth.

We will continue to remain disciplined in our telco maintenance capital, while we continue to evaluate opportunities to position our network for higher bandwidth.

That concludes my prepared remarks for today.

At this time, the operator will provide further instructions for the question and answer portion of our call.

Thank you, sir.

(OPERATOR INSTRUCTIONS) First question comes from Simon Flannery from Morgan Stanley.

Pardon me, sir, your line is open, if you have your phone on mute, can you unmute your phone, please?

Our next question comes from [Gray Jabely], UBS.

this is [Gray Jabely UBS] A couple of questions, first yesterday Citizens mentioned on their call, that they were seeing some aggressive promotions in their western markets from Charter, just curious, given your relatively large overlap with Charter, if you saw the same [inaudible] pick up a little bit to 5.2%, from the 5% in the first quarter?

And then secondly, just wondering if you have any thoughts on the upcoming 700-megahertz options, if you would consider joining a coalition, or just bidding on your own?

That would be great, thanks.

Yes, we have seen Charter pick up their promotions in recent weeks and months, it's difficult to say what impact it will have on access line and losses.

We have about a 25% overlap with Charter today, 23%, I think on overlap with Charter today, and they have been very aggressive, but we don't see any unusual impact.

There will be some increased competition in some of their areas, but we don't expect major impacts right now.

But they are being more aggressive than they have in the past.

Regarding the 700-megahertz, we are still evaluating whether to participate in the 700-megahertz auction.

In some way, this week the FCC's meeting provided clarification of some key issues surrounding the auction.

We really don't have any major issues with their proposal.

However, the Commission has not released the order containing the final draft of the rules which we will want to study, before we determine our best course of action.

So we have not made any decision.

We are talking with partners about the possibility of bidding.

And our focus would be to acquire spectrum covering our current operating areas on a regional basis.

But we have not made any final decision.

Okay, thanks.

Can you update us on regular cable/VoIP overlap at the end of the second quarter?

Based on the analysis of the public sources, we estimate our cable VoIP catastrophe lap is in the 30 to 35% range.

We have seen additional rollout of VoIP from competitors this past quarter, expect additional rollouts in the months ahead.

We are now including Madison River in our numbers where the VoIP competition is currently very low.

Great, thanks.

Our next question comes from Mike McCormack from Bear Stearns.

Hi guys, thanks.

Maybe a couple of questions on the guidance for the back half.

I think you are mentioning sort of unanticipated reduction in costs.

Maybe give us a sense for whether that is synergies or some other cost reductions that you had not anticipated earlier in the year?

And then maybe connected to that, the long distance and Internet revenue.

Why is that, do you think, trending higher than what you thought a few months back?

Thanks.

Mike, the original guidance that we give included our budgeted operating expenses, and our folks have just done a really good job of taking headcount out through attrition more or less, and just been real careful about with they have been spending.

So I think we are more comfortable now that we are going to come in under budget from an expense standpoint in the latter half of the year, and we are in turn, building that into our guidance.

In terms of long distance and Internet revenues, we just our Internet customer base has grown faster than we had originally projected, and from a long distance perspective we are having some incremental price increases for folks who are not on our unlimited plans.

Stewart, with respect to the headcount, are there other cost reductions as well?

If you can, maybe quantify the number of headcount reductions?

There are other items that are lower than what we budgeted, but it is just kind of all across the board in terms of the amounts.

And from a headcount standpoint--

This is Karen, in general, I would say that the team is doing a very good job, and through just attrition and we are managing as we have vacancies very well.

Okay.

Thanks guys.

Our next question comes from Frank Louthan from Raymond James.

Great, thank you.

A couple of things.

Broadband, what are your plans going forward again seeing some weakness across the board, but are you seeing anymore aggression coming from competitors, do you have any particular plans to try and continue to move the ball forward there?

And an update on your CLEC activity out of the fiber business, what are you seeing as far as demand there from both carriers on the wholesale side, as well as demand from the enterprises that you are serving, where do you see that going for the back half?

Thanks.

Frank, on the broadband side, there is more competition, primarily it is coming from the Triple Play is, of course the cable companies rolled out their Voice over IP, that is where we are seeing more of the competition.

We don't think we will see an acceleration in our adds, but we don't expect major declines for the rest of the year with our broadband adds as well.

The fiber business, we are still seeing consistent demand there, we don't see any major changes for the rest of the year.

We have seen really good growth, over 20% growth first half the year, and we expect at least the end of the year to see similar growth.

Great.

Thank you.

Our next question comes from Tim Horan from CIBC.

Thanks guys.

A couple questions.

One, the other income was kind of strong last quarter and this quarter.

Is this a good run rate?

Can you maybe talk a little bit what is going on in there?

And then trying to delve into the operating expenses a little bit more, can you talk about fundamentally what is really driving down expenses?

Because you do a great job there, maybe what you are doing with technology or other things, that will continue to drive down expenses maybe on a longer term basis, and how you feel about expenses over the long term?

Thanks.

Tim, the other income is not a good run rate going forward.

Two things this quarter that will not reoccur, one, we participated in a cellular partnership where we are a minority interest owner, and that partnership had some adjustments that they booked this quarter.

That increased this quarter's operating income from that partnership about, or our share of it, about $2.9 million.

So that was in this quarter, contributed about a $0.015 or so to EPS this quarter.

Additionally, we sold the bonds to finance Madison River before, a month or so before we closed so we had, if I remember right, about a million dollars of interest income in that line item this quarter, too, that will not reoccur next quarter.

Tim, regarding the operating expenses, we have done some automation work force management in the last couple years, that our middle management people have done a really great job with, our employees overall have done a great job in working with, to reduce our costs there.

We did some reorganization, Karen's group last year that really was effective.

It enabled us to reduce headcount and reduce our costs.

So we have made some changes that have been effective for us.

And you think we can see continued over the next couple years productivity improvements in this order of magnitude?

Or was this more one-time?

I want to touch base on leverage ratio, it seems like you are getting down to a really reasonable leverage, I'm just curious, how you guys look at that or think about it?

Thanks.

Regarding the maintaining this kind of cost containment, it is obviously the more you -- the more efficient you get, the more difficult it becomes, but we will continue to work at it, more automation, and just training employees to a greater extent in a lot of areas.

We see some ways to reduce costs, I am not sure we will be able to maintain this level of cost reduction.

Part of what we are seeing this year is the benefit of some changes that we made coming into 2007, related to our employee benefits, we eliminated our ESOP, which was, we were contributing about 4% of compensation for non-bargaining unit employees, we offset that with some increase in the 401(k) contribution.

And also we, our medical costs we are trying to control those as best we can, and pass along a little bit more of that than usual starting the first of this year as well.

And on the leverage?

Well, in terms of leverage, we feel like we are in really good shape from a liquidity standpoint, and assuming the convertibles get converted in the next couple of weeks, which we expect at this point, that will put us in real good shape.

Then we will talk with our Board in August and figure out what to do with our free cash flow going forward, or discuss that with them at least.

Thank you.

Our next question comes from Michael Rollins from Citigroup.

Hi, good morning.

I was wondering if you could talk a little bit about what USF was for the quarter, State and Federal?

And as you look into 2008, do you expect any transitory or adjustments positive or negative that you could see so far?

Thanks.

Michael, our USF revenues for the second quarter, the state revenues were about $8.9 million, and the interstate high-cost revenues were $41.4 million.

So we had a total of $50.3 million.

That is versus about 50.7 million in the first quarter of this year, and we really at this point, at least, don't really expect any changes for the remainder of this year, early next year.

And from a, you had a number of settlements this year hit the numbers.

Do you expect any more settlements over the next 15, 18 months, heading into 2008, from what you can tell, any negotiations that are ongoing on that front?

No, we don't, Michael.

This settlement is really the last one that we have related to the window closing on access revenues.

At this point we because our access revenues based on the earnings.

It depends on whether our tariff is deemed lawful or not, but at this point it has been deemed lawful, and so basically we are booking what we bill.

Thank you.

Our next question comes from Jonathan Chaplin from JPMorgan.

Hi, thanks, just a couple of quick ones.

On the access lines, I know access declines are down year-over-year, which is impressive given that the second quarter is seasonally tough, A, and B that you have got incremental cable competition in your markets this quarter.

I am just wondering what's driving the improvement in your legacy CenturyTel access lines?

And then getting back to the question that Tim asked earlier on the leverage, in terms of thinking about a potential additional share repurchase program the second half of this year, should we really be thinking about your available cash to return being sort of 200 or $250 million that you will generate in the second half of the year in cash, or is there an opportunity to use your balance sheet to that end?

And then finally, on the guidance, the $0.23 in settlement revenues that, or settlement impact that you expect in the third quarter, I think the comment on the call was that that was included in guidance.

I just want to make sure that that would imply EPS of $0.64 to $0.69, which is down a little bit from what you reported this quarter?

I'm just, if that's correct, I am just understanding why the pressure in 3Q?

Thanks.

Jonathan, Karen Puckett.

In terms of the access line loss, we reported a 29,300 loss this quarter.

A year ago, we had 24,117, that was normalized, remember we had some true-ups with some reporting in the Arizona access lines.

Our normalized would have been 24,111.

So we did have an increase year-over-year.

I am thinking in terms of rate of decline at 5.2% versus 5.6% last quarter on a year-over-year basis, it seems like it is improving on a year-over-year basis.

I don't know if I understand what you are saying, I think the adjustments might have played in there a bit.

Okay.

Jonathan, regarding the free cash flows, we don't expect to lever up with the program right now.

That is not in the numbers we have given.

We do expect to be able to, if we decide to go that route, there will be cash available obviously for stock repurchases or delevering.

Our Board will meet in August, later this month, and we will decide at that point what, how we want to approach the rest of the year with use of free cash flow.

And lastly, the pressure on EPS in the third quarter, if you take the revenue settlements out of guidance, yes, but that is consistent with basically that the partnership that we participate in this year, the adjustments to that, positive adjustments to that, in the second quarter, generated about a $0.015 or so of EPS.

And then the remainder of the decline between second and third quarter would really be due to just continued expected continued access line losses.

And access minutes.

Okay.

Wouldn't a lot of the cost savings that you had gotten during the course of this quarter, kind of roll through on a full quarter basis for next quarter as well, offsetting some of that pressure?

Really, it is built in.

It is really already built in.

Thank you very much.

Our next question comes from [Patrick Ryan] from Lehman Brothers.

Hi guys, thanks for taking the question.

Real quick one on CapEx guidance, I think you said 300 to 325, and I believe it was previously at 325 not including Madison River, which was, I think, about 20 million a year.

Just wondering why the decline there?

And then secondly, if you could discuss maybe your IPTV trials in Lacrosse and how that is coming?

Thanks.

The CapEx, as we said, we expect to be in the $325 million range for the year.

We are seeing some decline, we had some amounts in the budget for broadband wireless and special projects also, that we don't expect to complete.

And we have Madison River will be about another 8 million during the year.

So all that combined, we still think we will come in around the 325 level for the year.

The IP trials in Lacrosse, and in Columbia continue to go well.

We restarted our door-to-door efforts in Lacrosse, having good results there in some communities after a year in service there, we are seeing 15% penetration levels, that is without DVR, without HP TV, which we hope to have both of those by year-end in Lacrosse.

In Columbia, we have a little over 100 customers in the second phase of our trial, it is going very well, it's been well-received by those who have it.

And we are on-schedule to roll out to the full market by year-end in the City of Columbia.

One quick follow-up.

Could you break out maybe what percent of your lines are at a length capable of receiving IPTV now, and what should you be able to get that to?

It's very, very small today, only, we have about, I think about 15,000, 16,000 homes passed in Lacrosse, we will pass about 35,000 homes in Columbia.

So a very small percentage of our total lines.

Okay.

Thanks.

Our next question comes from Chris Larsen from Credit Suisse.

All right, thanks.

Just one quick one.

You mentioned uses of cash, but you didn't mention anything about an acquisition pipeline.

Are you seeing anything out there?

Is there any sort of, now that Madison is completed, you are getting through the process of integration, anything else that you are seeing out there, and what you might be looking for?

We couldn't talk about anything that we were looking at today, but it's really been pretty quiet out there.

We are still very interested in acquisition opportunities.

We think there will be opportunities in the months ahead.

You never know until something rolls out, but we are interested, and we will be looking at the right opportunities when we believe the future cash flows can really drive long-term shareholder value, we are continuing to look at those opportunities.

Is there a perfect size, number of lines that you are looking for, or you'll do anything from 10,000 lines to whatever?

I don't think there is a perfect size of lines.

Maybe the effort is too great on a very, very small situation, but we will look at every opportunity, and it just depends on a lot of factors.

Basically, the returns you could drive over time, things like plant condition, demographics, regulatory situations, those are all factors we have to consider.

Thank you.

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

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

Glen Post for any closing remarks.

Thank you.

In closing, CenturyTel continues to achieve solid financial results in what is obviously a competitive and challenging environment.

We are pleased to have completed the Madison River acquisition, we believe these assets are excellent additions to our existing operations, and we are moving forward with integrating these assets into our operations.

Additionally, we are committed to continually evaluating the best uses of our strong cash flows to drive shareholder value over the long term.

We appreciate your participating in our 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 nice day!

Thank you.