Lumen Technologies Inc (LUMN) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to CenturyLink's second quarter 2010 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, Sied.

Good morning, everyone, and welcome to our call today to discuss CenturyLink's second quarter 2010 results released earlier this morning.

For those of you viewing through the Internet, the slide presentation we will be reviewing during the prepared remarks portion of today's call is available on CenturyLink's IR website at ir.centurylink.com, or the investor relations section of our corporate website at www.centurylink.com.

Unless otherwise noted in the press release, the slide presentation or in our remarks this morning, the second quarter 2010 results discussed during our call today include the effect of the Embarq acquisition completed July 1, 2009.

At the conclusion of our prepared remarks today, we will open the call for Q&A.

Turning to slide two, slide two contains our Safe Harbor language for your information.

We will be making certain forward-looking statements today, particularly as they pertain to guidance for third quarter and full-year 2010, selected information regarding 2010, the Embarq integration and the pending acquisition of Qwest, 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.

Turning to slide three, as a result of the recently announced Qwest transaction, we are required to provide the additional information shown on this slide disclosing matters relevant to that transaction.

We ask that you review this additional information, which is in our press release, this slide presentation, and our SEC filings.

Now moving to slide four, we ask that you note that our earnings release issued earlier this morning and the slide presentation and remarks made during this call may contain certain non-GAAP financial measures.

Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available in our earnings release and on our website at www.centurylink.com.

Turning to slide five, your host for today's call is Glen Post, Chief Executive Officer and President of CenturyLink.

Joining Glen on our call today is Stewart Ewing, CenturyLink's Chief Financial Officer.

Also available during the question-and-answer period of today's call is Karen Puckett, CenturyLink's Chief Operating Officer.

Our call today will be accessible for telephone replay through August 10, 2010, and accessible for webcast replay through August 24, 2010.

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 August 4, 2010, and should be considered valid only as of that date, regardless of the date listened to or reviewed.

As you turn to slide six, I will now turn the call over to your host today, Glen Post.

Glen?

Thank you, Tony.

Appreciate you joining us today as we discuss CenturyLink's second quarter 2010 operating results and selected operational updates, as well as our guidance for the remainder of 2010.

We achieved solid results for the quarter, as we realized operating revenues near the upper end of previous guidance, and diluted earnings per share that exceeded previous guidance, and First Call Consensus for the quarter.

We also achieved solid high-speed internet additions and continue to see significant improvement in year-over-year access line losses, primarily driven by improved line loss results in the legacy Embarq markets.

The integration of Embarq continues to proceed well, and we continue to make good progress on obtaining the approvals necessary to complete the pending Qwest transaction, another transformative acquisition for CenturyLink.

Moving to slide seven in the deck, we are pleased to report solid financial and operating results for the second quarter.

Operating revenues were $1.77 billion for the quarter, near the top end of our previous guidance range for the second quarter.

There were several factors that contributed to this revenue performance for the quarter.

First, we experienced lower access line loss during the quarter than we had previously anticipated.

We also continued to see revenue growth from high-speed Internet customer additions, and we experienced higher-than-anticipated data circuit demand from wireless providers adding capacity to their networks to handle increasing wireless data traffic.

Diluted earnings per share, excluding nonrecurring items, was $0.88 per share for the quarter, an increase of 6% over the second quarter 2009.

This is $0.03 per share above the top end of our previous guidance, and First Call Consensus of $0.85 per share.

Several factors contributed to this outperformance during the second quarter.

First, the revenue performance that I outlined a moment ago.

Second, we continue to achieve synergies from the Embarq integration earlier than originally anticipated.

And finally, our employees continue to do an excellent job in containing operating costs across our business.

Our cash flows remain strong, as we generated free cash flow of more than $428 million, excluding nonrecurring items, during the second quarter.

Additionally, we achieved approximately $75 million of total operating expense synergies associated with the Embarq integration during the second quarter.

We attributed about $10 million in incremental synergies when compared to the first quarter of 2010.

As of June 30, we had achieved an annualized operating spent synergy run rate of approximately $315 million.

We currently expect to exit 2010 at approximately a $330 million annualized operating expense synergy run rate.

You will recall that we originally anticipated approximately $300 million of full run-rate and operating expense synergies when we announced the Embarq transaction in October, 2008, and then in August 2009 we updated that synergy target to $375 million after further diligence and deeper insight into the benefits of this merger.

Turning to slide eight in the deck, the Embarq acquisition, along with our specific marketing strategies, improved CenturyLink's year-over-year revenue mix by decreasing our reliance on access revenues.

Additionally, revenues from data services accounted for 26.7% of second quarter 2010 total operating revenues compared to 22.5% in second quarter 2009.

Also, access revenues represented only 15.5% of total operating revenues in the second quarter of 2010, and it reflects the Company's lower reliance on network access related revenues.

We continue to experience growth in data revenue, driven primarily by the year-over-year growth in high-speed Internet customers, and increased demand by business and wholesale customers for high-bandwidth services, and we remain focused on positioning CenturyLink as the broadband provider of choice in our markets by enhancing our broadband product portfolio through deploying higher speeds in key markets and expanding the availability of ethernet and [op e based] product offerings.

Now turning to slide nine, I'll cover a few additional highlights for the quarter.

First, we added more than 29,000 high-speed Internet customers during the quarter, as demand for broadband remains solid and customers continue to respond well to our broadband offers, our targeted marketing strategy and our region operating model that places sales and service closer to our customers.

Our high-speed Internet additions were a little below our guidance of 32,000 to 36,000, primarily due to continued economic issues and seasonality impacts due to our success with snowbirds and students in prior quarters.

Our performance in the second quarter still represents an improvement over pro forma high-speed Internet additions in the second quarter a year ago.

We ended the quarter with approximately 2.336 million high-speed internet subscribers, or 39.9% penetration of our broadband-enabled access lines, and approximately 36.3% penetration of total addressable access lines.

We are pleased that we have been able to add more than 190,000 high-speed internet customers since closing the Embarq acquisition, representing approximately 9% year-over-year growth in total high-speed internet customers.

Our second quarter line loss of approximately 146,300 was better than we had anticipated going into the quarter, and it represents a 22% improvement over pro forma second quarter 2009 access line losses.

We continue to see a decline in outs, or disconnect orders, in both the consumer and business segments, which we believe is attributable to a more stable economy, resulting in fewer moves, less business line downsizing, and fewer competitive ports.

We have also increased our focus from noncustomer/cord cutters, and strengthened our distribution channels.

We are pleased that we have been successful in reducing our rate of line loss for the trailing 12 months ended June 30, 2010, to 8%, a significant improvement from the 9.3% pro forma trailing 12 month line loss just a year ago.

We also continued to experience strong demand for our video bundles, as we added more than 26,000 satellite video customers, ending the quarter with more than 594,000 satellite video customers.

Our satellite video agreement with Echo Star/Dish expired July 31, 2010, and effective August 1 CenturyLink began offering DIRECTV satellite television service to customers across our 33 state operating footprint.

DIRECTV has a record of quality customer service and additional features, such as NFL Sunday Ticket and whole home DVR capabilities that will offer additional benefits to our customers.

CenturyLink's Dish customers will continue to receive the Dish services they have today for as long as those customers choose to maintain that relationship.

We also continue to develop our IPTV capabilities in Columbia and Jefferson City, Missouri, and LaCrosse, Wisconsin.

We are utilizing a multiple pair and pair bonding over ADSL 2+ and VDSL-2 on longer loop links in LaCrosse and Jefferson City, enabling us to expand our addressable households in these markets.

All these markets receive their national content from our Columbia, Missouri video MPEG [four head end] over our national fiber network, and we remain pleased with the results in all of these markets are in the preliminary stages of launching IPTV service in Las Vegas.

Additionally, we continue to expect to roll out IPTV service in four additional markets by mid-year 2011, bringing CenturyLink's total IPTV markets and service to eight at that time.

Moving to slide 10, access line performance and the high-speed internet customer growth trend in our top urban markets improved significantly in second quarter 2010 compared to pro forma second quarter 2009.

In these markets we experienced a 26% improvement in average access line loss year over year, and approximately 108% improvement in average high-speed internet growth year over year.

We believe the implementation of CenturyLink's regional operating model with local market accountability and our targeted sales and marketing approach, along with a more stable economy, have been key drivers of this turnaround.

From a go-to-market standpoint, we made significant changes in the marketing approach utilizing these markets, and also introduced new product and service offerings to stimulate customer demand.

Now turning to slide 11, our employees continue to do an excellent job of containing costs, which contributed to the generation of strong cash flows during the quarter, in spite of a very competitive marketplace and economic conditions that remained challenging.

Operating cash flow, excluding nonrecurring items, of more than $922 million represents an operating cash flow margin of 52% versus 47.8% in the second quarter of 2009.

Additionally, we returned nearly $219 million of the $428 million of free cash flow generated during the quarter to shareholders in the form of cash dividends, representing a 51% payout ratio.

Turning to slide 12, the integration of Embarq continues to progress well.

We are pleased that we have been able to achieve operating expense synergies with the Embarq merger faster than we had originally anticipated, as well as the improvements we realized in line loss and high-speed internet additions.

We continue to expect to complete the building conversions of the Embarq customers by the end of the third quarter 2011, and we remain confident that we will also achieve our $375 million operating expense synergy target by late 2011.

Now moving to slide 13, planning for our acquisition of Qwest Communications is underway now that we completed the naming of our full senior leadership team, which can be found in our recently-filed S4.

We filed the required Hart-Scott-Rodino notification and report forms with the Department of Justice and Federal Trade Commission in June, and received clearance on July 15, 2010 to proceed with the transaction.

We have filed for merger approval with the regulatory commissions in 21 states and the District of Columbia, and to date we received approval in six of those states.

Application for Federal Communication Commission approval was filed in May and the formal comment -- reply comment periods have expired.

Additionally, we filed our final joint proxy statement prospectus on July 19, and CenturyLink and Qwest special shareholder meetings to vote on the merger are scheduled for August 24.

We will continue to diligently work to obtain the remaining state and federal regulatory approvals, and we continue to anticipate a first half 2011 transaction close.

As a reminder, the combination with Qwest would have resulted in pro forma 2009 revenues of $19.8 billion, and is expected to be immediately accretive to free cash flow per share, excluding integration cost.

The transaction should restrengthen the sustainability of CenturyLink's dividend while materially lowering the Company's payout ratio.

The combination also creates a robust national 180,000 route mile fiber network.

We expect to generate annual operating costs and capital expenditure synergies of approximately $625 million, which is expected to be fully realized three to five years following closing.

The combination of Qwest and CenturyLink will create a strong, highly-skilled employee base, and will establish a national industry-leading communications company.

With that, I'll turn the call over to Stewart for additional financial highlights and a review of our third quarter and full-year 2010 guidance.

Stewart?

Thank you, Glen.

During the next few minutes I will review some highlights of our second quarter 2010 operating results, and make a few brief remarks regarding our capital structure.

I will conclude the comments this morning with a discussion of third quarter and full-year 2010 guidance provided in our earnings release issued earlier today.

Now turning to slide 15.

Since we reported significant nonrecurring, or one-time items during the second quarter, I want to briefly recap those items for you before I discuss the second quarter normalized results with you.

First, we incurred approximately $18 million of pretax expenses, or about $0.04 per share, related to integration costs associated with the Embarq integration.

Secondly, we incurred approximately $13.2 million, or about $0.03 per share of severance costs during the quarter related to the Embarq transaction.

And finally, we incurred approximately $10 million of pretax expenses, or about $0.02 per share of costs related to the Qwest acquisition.

In the aggregate, these items represent the $0.09 difference in normalized diluted earnings per share of $0.88 and GAAP diluted earnings per share of $0.79.

Now moving to slide 16.

Due to the size of the Embarq acquisition on second quarter 2010 results compared to second quarter 2009 results, I will not discuss the percentage increases between the second quarter a year ago and second quarter this year.

However, I do want to point out that if you look at the percentage change column on this slide, the good news is that we were able to translate the increased revenues from Embarq into even larger percentage increases in operating cash flow, net income and free cash flow.

Also, please note that the last page of the financial schedules accompanying our earnings release this morning reflects CenturyLink's second quarter 2010 results, excluding nonrecurring items, compared to pro forma results for second quarter 2009, assuming the Embarq acquisition had been completed at the beginning of that quarter.

Now turning our attention to results for second quarter 2010 compared to second quarter a year ago, excluding nonrecurring items for both periods as outlined in our financial schedules.

For second quarter 2010, operating revenues increased nearly $1.14 billion to $1.77 billion from $634.5 million in second-quarter 2009.

The Embarq acquisition contributed operating revenues of $1.23 billion during the quarter.

Additionally, it's important to remember that effective July 1, 2009, CenturyLink began eliminating revenues and corresponding expenses each quarter associated with the discontinuance of regulatory accounting for certain regulated operating entities.

The amount of revenues and corresponding expenses eliminated in second quarter 2010 was $54 million.

Second quarter 2009 results do not reflect the same eliminations due to the July 1, 2009 effective date of discontinuance.

Cash operating expenses increased from $330.9 million in second quarter 2009 to $850 million for the second quarter this year, primarily due to $580 million of cash operating expenses associated with the Embarq acquisition, which more than offset the reduction in operating costs associated with the discontinuance of regulatory accounting that I mentioned earlier, and synergies achieved from the Embarq integration.

Depreciation and amortization expense increased to nearly $358 million in second quarter 2010 from $128.6 million in second quarter 2009, primarily due to increased depreciation and amortization associated with the Embarq acquisition, which more than offset depreciation expense declines associated with assets becoming fully depreciated.

Net income attributable to CenturyLink for the quarter was $265.7 million compared to $83.3 million in second quarter a year ago.

Diluted EPS for the quarter increased 6% to $0.88 from $0.83 in second quarter 2009, and free cash flow increased from $126.5 million in second quarter 2009 to $428.6 million in the second quarter of 2010.

Turning to slide 17, we have been successful in generating stronger year-over-year operating cash flow and operating income margins compared to pro forma 2009 results.

Our operating cash flow margin improved to 52% in second quarter 2010 from 50.7% on a pro forma basis for second quarter 2009.

While reported pro forma operating cash flow margin was 48.7%, the pro forma 50.7% includes an adjustment to eliminate revenues and expenses related to the discontinuance of the regulatory accounting.

Our operating income margin improved to 31.8% in second quarter 2010 from 31.2% on a pro forma basis for second quarter a year ago.

From a capital structure standpoint, CenturyLink remains very well positioned financially with a strong balance sheet.

CenturyLink's debt-to-equity ratio at the end of the June was 0.8 to 1, and net debt to second quarter 2010 annualized operating cash flow was 2.0 times.

We remain confident that our financial strength and liquidity provide us the flexibility to take advantage of opportunities and to meet challenges as they arise.

Finally on slide 18, I would like to discuss the third quarter and updated full-year 2010 guidance provided in our press release this morning.

As a reminder, costs incurred by CenturyLink during 2010 related to the Embarq integration, and any transaction or integration cost related to the pending Qwest transaction, are considered nonrecurring items.

These costs, along with any other nonrecurring items that may occur during 2010, are excluded from the diluted earnings per share guidance provided in our press release and in my comments regarding third quarter and full-year 2010 diluted EPS guidance.

With those points in mind, we're updating our 2010 guidance to reflect our second quarter results and our expectations for the remainder of the year.

We continue to expect operating revenues for the year to be 6.5% to 7.5% lower than 2009 pro forma operating revenues.

As you will recall, there are several one-time items that negatively impact the comparison of 2010 revenue with pro forma 2009 revenue.

Accordingly, normalized revenue decline is still expected to be in the range of 4.5% to 5.5%.

Our favorable second quarter results and lower than previously anticipated operating expenses result in an increase in the range of our free cash flow guidance for the full-year 2010 to $1.56 billion to $1.6 billion from $1.525 billion to $1.75 billion.

Based on these same favorable factors, we're also increasing the range for our diluted earnings per share for full-year 2010 from $3.20 to $3.30 to a range of $3.30 to $3.40, an increase of $0.10 per share.

We also continue to expect 2010 capital expenditures to be in the range of $825 million to $875 million.

For the third quarter 2010, we expect operating revenues to be in the range of $1.72 billion to $1.745 billion, and we expect diluted earnings per share for third quarter 2010 to be in the range of $0.77 to $0.81.

The sequential decline in diluted EPS from second quarter to third quarter is due to anticipated declines in access lines and access minutes of use, along with higher operating expenses, primarily due to seasonality in outside plant maintenance and increased advertising expense.

That concludes our prepared remarks for today.

At this time I'll ask the operator to provide further instructions for the question-and-answer portion of the call.

Thank you, sir.

(Operator instructions).

First question comes from David Barden.

Hey, guys, good morning, thanks for taking the question, I guess two, if I could.

Glen, this came up earlier in the Qwest call but I think I'll ask you guys, as well, which is, could you look at that portfolio state approvals that you need to work through and pick two or three that would be the long pole in the tent.

Where should I bookmark the PUC website so I can keep track of where the longest timetable might be to get this thing closed?

And then I guess second, thanks for laying out the stips and the results that you've taken in the Embarq territories.

Could you maybe, just based on your knowledge thus far, make a compare and contrast between the Embarq properties, the timetable and the results you've been able to generate and as you look at the Qwest properties the similarities and differences?

Thanks.

First of all, the -- thus far we're getting overall good cooperation.

Lots of questions from the state commissions and I'm sure there'll be a lot of requests for commitments.

We -- with this -- in our transaction, with the strong financial results, the cash flows and the balance sheet that we have, we don't expect the type of scrutiny that some transactions have been through but we will have it and they're going to push for a -- they won't really understand that this a transaction to consumers, businesses and we think they'll clear in this transaction.

We could -- the states were the last -- all we can talk about is the last states last time, I think Washington and Oregon were two of the latter states to approve and that was the Embarq transaction.

They may or may not be this time, but it's difficult to predict but from our last time those were two of the latter states that we received approval.

We don't anticipate significant problems but there'll be a lot of questions, a lot of issues before we get this done.

And regarding -- David, regarding the timetable of Embarq integration and Qwest integration, I'm not sure if you asked if there are issues with overlap.

No.

Anything that overlaps is (inaudible) -- it's a lot of (inaudible) employees but we are anticipating that and we realize -- we've said from the beginning we will not be making the transition, the conversions of billing systems and other systems as quickly with Qwest as we have about Embarq due to the continued work for the Embarq integration, but we will get those conversions done over time.

The -- there are -- as far as the market's concerned, they have the larger markets, and Qwest even has larger markets than Embarq but we do believe that our local operating model, our little bit different go-to-market strategies can be impactful here in these markets.

They have been in Las Vegas and Orlando and Tallahassee and we think we can see some results here with that -- a different approach and has more of a local market flavor.

Qwest is doing a good job.

We just think that we -- it's a little different approach, as it has with Embarq.

So we believe -- we're confident we'll see some improvements there.

The -- we expect also to have a lot of benefits from the enterprise business.

Their business markets group we think has growth potential and we're looking forward to working with them in this, once we get this combination complete.

Great.

Okay, thanks, Glen.

Our next question comes from Batya Levi.

Thanks a lot.

Two questions, one on the synergies.

It looks like the incremental you generated fell a little bit this quarter to $10 million from the $25 million you got in the first quarter, but the year-end target is still higher than what we saw.

Can you talk a little bit about why there was a slowdown in the second quarter and what are some incremental initiatives for the back half?

And the second question is on the broadband side.

It looks like, following a slowdown in the second quarter, most of the telcos are becoming more aggressive it their promotions and marketing.

Can you just give a little bit more specifics on how you plan to act in the broadband market, especially in the legacy Embarq markets?

Thanks.

Batya, in terms of the synergies, the $10 million incremental increase is really in line with the expectations.

We actually probably a little bit ahead.

We -- at the end of the second quarter we achieved $65 million of synergies during the second quarter.

Our run rate coming out of the second quarter was -- first quarter --I'm sorry -- was $65 million in the first quarter, $270 million was our run rate coming out of the first quarter and we expected to end the year at about $300 million run rate.

Now at the end of the second quarter we are updating that to where our run rate coming out of the end of the quarter has gone from $270 million up to $315 million and we now expect our year-end run rate to be about $330 million.

So we've actually increased the speed at which we've been able to achieve some of the synergies and increase the run rate that we expect to exit the year at..

And one specific item, Sitya, we completed a significant portion of the integration of the Embarq traffic to our long-distance network -- our network, which we now have about 70% of the long dist -- Qwest long-distance traffic converted to our network and we achieved that in the second quarter.

A little ahead of schedule, actually, so that's going to -- we won't have the same incremental impact of that going forward as we had in the second quarter.

Sounds good.

On the broadband question?

Broadband question, Karen Puckett here.

In terms of the broadband, first off, if you look at the quarter we year over year our inwards were up and so we feel good about what's happening in the market.

The outpour, a little higher than we anticipated, really is driven by it.

We did such a good job in the fourth quarter going after the snowbirds in Florida that we didn't anticipate that level of out, so when you look at it we feel good about our performance going forward.

What we see from a competition standpoint is some of the smaller, regional players are becoming more aggressive.

Our plans are to continue to really get more local and make sure that we have the right offers in the marketplace, so it's really going to be local driven.

Okay, thank you.

Our next question comes from Jason Armstrong.

Hey guys, Scott Goldman on for Jason Armstrong.

A couple of questions.

One, wanted to talk about this.

Maybe you can give us a sense for where you are in terms of broadband penetration in the legacy Embarq markets.

Looks as though you've been making very good progress obviously in some of the big markets there.

Want to see if that's something that you guys are really focusing on the big markets or if it's something that's really something you're doing across all of the legacy markets and where that penetration stands relative to the legacy CenturyLink markets?

And then just wanted to dig a little bit deeper into the broadband.

I think the last quarter you provided guidance for one of the first times that I can remember for the quarter.

You came a little bit lighter than that.

Just wanted to get a sense for what you saw change throughout the quarter.

I would think seasonality was probably expected perhaps, as Glen mentioned, a little bit softening in the economy, but was there a step change that occurred later in the quarter from when you issued the guidance that drove the results?

Yes.

Scott, first of all, on the penetration issue, if you look at legacy CenturyLink markets we're over 40% penetration of high-speed internet in those markets.

We're in the low 30% in the legacy Embarq markets and some of the larger cities lower than that.

The real progress we've made recently and you would expect, is in the lower-penetrated markets where we've done very good job, I think, in the Embarq markets of bringing that penetration up the last few quarters.

So that's where the advance has been but there's still a gap there between the legacy CenturyLink and legacy Embarq markets.

So we have put a lot of focus on these larger markets where we think the opportunity has been.

And the -- oh, the broadband guidance -- the reason we put guidance in a very narrow guidance last time it was basically because we had an outstanding, unusual quarter.

In the first quarter we added 70,000 broadband customers in the first quarter and we wanted to make sure the market didn't think that was the pace going forward.

That's why we gave that narrow guidance.

We missed it a little bit and primarily the market was just tougher than expected.

You saw -- you've seen in all the other carriers who announced that it was a tough quarter so it was a little tougher than we expected.

We still had a good quarter overall but didn't quite hit our target level.

Okay, great, and then one quick follow up for Stewart.

I guess just looking at the revenue guidance, assuming I'm using the right third-quarter 2009 number, which I think should be clean from some of the regulatory accounting, looks as though we may see a little bit of a step-up in the rate of revenue decline from what we've seen the last couple of quarters.

Anything one time in nature that we should be thinking about as we look at the third-quarter revenue run rate?

Yes.

In -- from the standpoint we've still seen some of the rehome that we talked about earlier and we expect that to pick up somewhat, as well as the LD migration that we talked about in the last quarter and we expect those to pick up some in the latter half of the year.

Okay, great.

Thanks, guys.

Our next question comes from Frank Louthan.

Great, thank you.

Can you give us an idea of your net exposure to access and subsidy revenue when you net out the revenue and then the expenses on terminating access?

And then, what is your current percentage of revenue that comes from commercial and wholesale revenue right now?

Thanks .

Frank, just let me see if I can grab the --

Frank, while Stewart's kidnapped and looking for that, a reminder.

Our exposure to USF service revenue has gone down significantly now.

We're only 6.5% of our revenues from USF today and that will go down even further with the Qwest transaction, So we're seeing access and USF become lower -- less and less a percentage of our total revenue.

Yes, Frank, and wholesale revenue is about 25%, so basically about 25% of revenue is wholesale revenue.

Okay, great.

Thank you.

Our next question comes from Dave Coleman.

Great, thank you.

Just going back to the synergies, I guess from sequentially achieved additional an $15 million run-rate synergies, second half of the year you're only guiding towards an additional $15 million yet it seems to be that a lot of the integration will be completed the second half of this year, so I'm trying to reconcile why synergies would expec -- we should expect synergies realized as slow with much of the integration likely to be completed the second half of the year?

And then just a question on the satellite resell agreement with DIRECTV.

Was there any change in the economics -- I guess meaningful changes to the economics to CenturyLink to foster that change?

And then final question, just on use of capital, looks like be facing higher dividend tax rates beginning of 2011.

Would you anticipate any change to dividend policy, or use of capital where you would apply that more to share buybacks as more shareholder-friendly use of capital rather than paying dividends?

Thanks.

Yes, in terms of the synergies basically, as Glen mentioned earlier, we were able to get more of the traffic -- long-distance traffic migrated over to our network in the second quarter than we anticipated, so that happened a little bit faster than we anticipated.

We had expected some of that during the back half of the year.

Also, from an IT standpoint they were able to reduce their costs somewhat from a maintenance standpoint a little earlier than we expected.

From the standpoint of just the integration, we still have -- we expect to get one more billing conversion done in the latter half of this year but we'll still have two billion convergence to do in 2011.

And pretty good bit of the remainder of the synergies is really tied up to the completion of the billing conversions and decommissioning those systems and getting off of the maintenance and the software costs that are -- and hardware costs that are associated with maintaining that billing system.

So that's why that'll come more in 2011.

And, Dave, there were no significant changes in economics with DIRECTV -- going from Dish to DIRECTV.

Both good companies, we just felt like DIRECT gave us a few more advantages and that's why we selected to go that route.

And in terms of return of capital, we'll have to see what happens with the higher dividend rates in 2007 -- in 2011.

The -- of course the dividend's a board decision and the return of capital to shareholders is a board decision, but this is something we've not discussed with the board at this point but we don't anticipate any changes right now.

Great, thank you.

Our next question comes from Chris King.

Hi, good morning.

Most of my questions have already been asked but I did want to see if I could get an update from you guys on the regulatory front in Washington.

Obviously, seeing some movement there on a number of fronts, be it from net neutrality to the universal service bill that's being put forth to continue discussions on intercarrier compensation.

Just was wondering if we could get your very high-level view on progress that's being made in Washington on any one of those issues and what timeframe investors should be looking at in terms of any material changes that you expect to see over the coming quarters?

Thanks.

We think it's going to be -- the progress we've made, Chris, I think will be slow over the coming months.

Of course, the national broadband plan was released in March and it did organize the commission's work around broadband and really touched nearly every subject in the FCC's jurisdiction.

It established a timetable for the FCC's considerations of the issues over the next two years, possible steps on more than 60 or so items over the next year.

The broadband plan addresses broadband deployment, adoption initiatives, as well as universal service, intercarrier compensation, such as, of course, net neutrality, intercarrier compensation reform, special access, all those things are in there.

There's -- obviously it's hard to predict the ultimate outcome on these issues.

We do believe the FCC is likely to take a pro consumer, pro competition approach, particularly with respect to policies that affect consumer internet experience and the access to content, whether it's online applications or access to programming.

We also expect USF support to shift to broadband deployment, which we believe is the right direction.

Overall we think the move is going the right direction.

We're concerned about the Title II efforts, of course, as everyone in our industry is.

It's really a matter of how that's implemented, though, and we believe there'll be caution taken here and nothing that will be -- I just believe the commission and the chairman will be careful about implementing that but we are very concerned.

A negative ruling there, we have a totally open internet, could impact -- or would impact investment in the internet and we -- all the carriers have to reconsider their commitment to investing in the network if some of the proposed plans were adopted, but I think there won't be a flash cut there, I think we will have reasonable come out of the commission.

So we'll continue to focus -- our focus and discussion regarding the issues with the FCC and industry players in the weeks and months ahead and look for some progress getting made this year but probably into 2011 before we see major advancement there.

If I could ask one follow up.

How involved are you directly or indirectly in the net neutrality negotiations that are currently ongoing at the commission?

We're certainly involved.

Let me see, AT&T's the world -- Googles the world that's probably more involved leading that charge versus us, but we're certainly a part of it and share concerns that AT&T and Verizon have there.

Thank you.

Our next question comes from Chris Larsen.

Hi, thanks, a couple of questions.

First, Karen, I wonder if you could just talk a little bit about how long those loops are in your test markets for the IPTV and what specifically you're looking to see about potentially moving that out to more markets?

I know you've had that in trial phases for some time.

And then secondly on wireless, just what your thoughts are there.

Qwest has been reselling the Verizon Wireless product, you obviously own your own 700 megahertz, what your strategic thoughts there are on wireless?

And then if you could remind me what the build dates are for that 700 spectrum, if you have minimum requirements coming up in the next year or so to build on that?

Thanks.

I'll take the IPTV then I'll let Glen address wireless.

In terms of IPTV in our test market, with the bonding we're comfortable right now at 8,000 and can see that perhaps going up over time but what's important rate now is that we perfect that spawning process and we have a good customer experience.

We're going to be pretty cautious in how we feel about that.

And on wireless we think wireless would be nice to have in the bundle like Qwest, and I'll let Glen talk about 700 megahertz.

Yes, Chris, we are looking at the reselling options with Verizon and other carriers and considering that, as you know, Qwest has had some success there and some good progress there actually in the last couple of years so we're looking closely at that.

Regarding 700 megahertz, obviously as we thought before today, our coverage area and our ownership that we have of spectrum is only about 15% of our total access line coverage access (inaudible) areas.

Market areas would be less, of course -- [considerably] less when we complete the transaction with Qwest.

We do think and continue to believe this is valuable spectrum.

As far as the build-out requirements are concerned, we have to build out 35% of the geographic footprint by 2013 and 70% by 2019.

If we happen to miss a 2013 build-out deadline then we have to build out 70% by 2017 so we have time to make some decisions about what we're going to do with that spectrum.

Great, thank you.

Our next question comes from Tim Horan.

Thanks, guys.

Is there any possibility that total Embarq synergies might be increased a little bit?

I know you're not giving guidance here, but do you see the potential for that?

And just in that regard, when you speak -- it sounds like you'll be close to 90% done with the integration process by the end of the year.

Is that the correct way to think about it?

And then just lastly on the broadband front, I guess kist a lot of concern by investors out there that the cable guys have substantially higher speeds with the DOCSIS 3.0.

Do you think that's a primarily factor in some of the market share shifts that we're seeing in the industry?

Not so much for you guys, but the potential that you might see a year from now and is there ways for you to catch up on the speed front to them?

Thanks.

Tim, in terms of the Embarq synergies we're not prepared at this point to increase the synergies.

We are, however, very confident that we'll be able to get the level of synergies that we discussed and we've been able to achieve the synergies a little bit quicker than we expected.

But any change in the synergies would come later as we get some of these other billing conversions done.

With respect to where we will be by the end of 2010, with the next conversion we'll have about 50% or so of the customer base converted to -- from the legacy Embarq billing and customer care platform over to the legacy CenturyLink billing and customer care platform and then we have other system conversions that are in process, as well.

And Tim, regarding the DOCSIS technology and the higher speeds, certainly we'd like to -- we continue to build fiber deep into our networks and taking higher bandwidth to customers.

Obviously, the bonding I just talked about is significant and it helps a lot.

Where we can get 25 megabits, for instance, we can have three HDTV channels plus a digital -- switch digital channel and three to five, six megabits of high-speed internet, and that's if everything's in use at once.

So we -- at that level we feel like we are pretty competitive for some time.

We realize that demand for bandwidth is going to continue but we think we can be competitive.

We bring new products, have our local market approach and also on the business customers we're bringing fiber to panel in a lot of our business -- major business customers so we are getting -- we are going to be very competitive on the business side of things.

So it's a matter of what the consumer really wants and the relationship we can build there.

Our goal is to own the broadband access, the homes, the businesses in all of our areas and we're working hard to do that and investing every month in deeper acc -- fiber access and also electronics to help us build the speeds and products.

Glen, it just seems like the cable guys have gotten a little ahead, though, with DOCSIS.

Could you may -- should you maybe accelerate you CapEx to point it a little bit to catch up to them?

I'm not saying so much in your territory and maybe you can give us some color on your territory, but that seems to be the case in a lot of the major urban areas right now.

Yes, we can see some acceleration there to -- or redeployment of our capital budget into those areas where we think we're going to have more competition and we're looking at that as we speak.

And of course, with the Qwest markets it's more intense competition from a few of its larger markets so we will be looking at opportunities there to expand on their fiber deployment that they've worked hard on the last couple of years and it's been, I think, a really good project for them and we'll be looking to expand.

Thank you.

Our next question comes from Phil Cusick.

Sorry, guys.

Wondered if you could just talk about overall business activity and small business creation and is there such differences across regions and types of markets?

What are you seeing?

Thanks.

In terms of business activity, what I would say is that it's stable in terms of outs as opposed to last year where we were experiencing quite a few outs business closing.

In terms of business starts, though, I think that that is not improving a lot.

We're not seeing a huge increase there yet.

Okay.

One of your compatriots talked about a little bit about improvement there.

Thanks, guys.

Our final question for today comes from Nichole Black.

Good morning, guys.

You said in the past that it was your intention to pay off your 2010 debt maturities of which you've got a little over $482 million due in October.

I know you've upped your free cash guidelines but since your balance sheet had less than $200 million as of June are you comfortable that you can generate enough free cash flow in the back half of the year to still accomplish the goal?

Yes, Nicole, we will -- we'll use a combination of free cash flow and our credit facility to pay off the maturity that's coming up in October.

We made a pension contribution of $300 million earlier in the year.

Without that we probably could have paid that maturity off, but we'll draw on the credit facility, which we have plenty of capacity on, as well as use free cash flow.

Great, That's helpful, and then last question.

You had such good first-half margin performance and clearly your synergies are rolling in faster than expected.

Can we infer that this margin strength is sustainable in the back half of the year?

Yes, based on the guidance that we're giving we're expecting our margins to come down somewhat in the second half of the year, with the revenue declines that we expect to see related to access line losses and switched access minutes declining.

But again, we hope to see improved synergies in the back half of the year, as well, compared to the second quarter, so that'll offset some of it.

Great.

Thank you very much.

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.

In closing CenturyLink continues to build on the strong results we've achieved over the last year.

Since closing the Embarq transaction, we achieved solid results in the second quarter of 2010.

We also made solid progress toward achieving our Embarq acquisition operating expense synergy target in the first half of this year.

Also over the past year employees have done an outstanding job of remaining focused on the day-to-day operations of our business while simultaneously integrated the Embarq operations into our Company.

The preliminary work on the Qwest transaction approval process and planning for the Qwest integration are going well and we continue to expect to close the transaction in the first half of 2011.

So thank you all for participating in our call today and we look forward to speaking with you again 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 wonderful day.