Lumen Technologies Inc (LUMN) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to CenturyLink's fourth quarter 2010 earnings conference call.

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

Later, we'll 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.

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

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.

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

Now 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 2011, 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.

Moving to slide three, we ask that you also note that our earnings release issued earlier this morning and the slide presentation and remarks made during this call 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 four, 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.

And 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 February 21, 2011, and accessible for webcast replay through March 7, 2011.

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 February 15, 2011, and should be considered valid only as of this date, regardless of the date listened to or reviewed.

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

Glen?

Thank you, Tony.

We appreciate you joining us today as we discuss CenturyLink's fourth quarter and full year 2010 operating results, as well as selected operational updates and 2011 guidance information.

First, we reported solid results for the fourth quarter and the full year 2010.

We achieved operating revenues in the fourth quarter that exceeded the top end of our guidance, and diluted earnings per share near the top end of our guidance.

Operating revenues for full year 2010 were $7.04 billion, representing a year-over-year increase of 41.6%, primarily driven by the mid-2009 acquisition of Embarq, along with continued growth in strategic revenues.

Second, we achieved solid high-speed Internet subscriber additions during the fourth quarter and full year 2010, resulting in an annual subscriber growth rate of more than 7%.

Additionally, we improved our absolute access line decline of more than 20% for full year 2010, compared to pro forma full year 2009.

We also continued the expansion of our Prism, our IPTV service, and we're expanding our ethernet private-line service across our footprint to better serve our business and wholesale customers.

The integration of Embarq continues to proceed well, and we continue to make good progress toward completing the pending Qwest transaction.

Now, moving to slide six in the deck, operating revenues were $1.72 billion for the quarter, slightly ahead of the $1.71 billion top end of our guidance.

Diluted earnings per share, excluding nonrecurring items, were $0.76 per share, $0.01 lower than street consensus according to First Call.

Our cash flows remain strong, as we generated free cash flow of $342 million during the fourth quarter, excluding $9.1 million of capital investment related to the Embarq integration.

Additionally, we achieved approximately $85 million of total operating expense synergies associated with the Embarq integration during the fourth quarter, ending the year with an annual run rate -- with annual run rate synergies of $340 million.

There were a few factors that contributed to our operating revenues exceeding the top end of our previous guidance for the quarter.

First, we lost fewer access lines than we had forecast for the quarter.

Second, our access line -- our access minutes of use, rather, declined at a slower rate than we had anticipated for the quarter.

And finally, we had a couple of prior period true-ups that possibly impacted revenue.

There were also a few expense items that were higher than we had anticipated for the quarter.

First, we incurred higher pole rental expenses than anticipated, due to seasonal cost adjustments under certain contracts.

And second, we incurred higher contract labor and overtime charges than expected, driven by expansion of our IPTV service, weather impacts, and conversion initiatives.

Demand for our strategic products and services continues to grow, and strategic revenues are increasing as a percentage of total operating revenues.

In fourth quarter 2010, strategic revenues accounted for 31% of revenues, compared to 28% in fourth quarter 2009.

The growth in strategic revenues as a percentage of total operating revenue is a positive trend that we are focused on continuing, and which we expect to rely on -- relies on revenues from traditional -- reduced reliance of revenues from traditional legacy voice and access sources.

We remain focused on positioning CenturyLink as broadband provider of choice in our markets.

We continue to enhance our broadband product portfolio to deploying higher speeds in key markets, as well as adding incremental value through broadband [features] and computer support and online backup services.

Also, we continue to enhance and expand our advanced data and IP networks and value-added services for our business and enterprise customers.

And now, turning to slide seven, I would like to cover a few operating highlights for the quarter.

First, we added nearly 29,000 high-speed Internet customers during the quarter, as demand for broadband remains solid and customers are continuing to respond well to our broadband offers.We ended the quarter with approximately 2.4 million HSI customers, or 42.1% penetration, of our broadband-enabled access lines, and approximately 38.5% penetration of total addressable access lines.

We are pleased that we were able to add more than 158,000 high-speed Internet customers during 2010, representing approximately 7.1% year-over-year growth in total high-speed Internet subscribers.

In addition, we experienced lower access line losses during the quarter than we had previously anticipated.

Our fourth-quarter line loss of approximately 123,000 represents a 12% sequential improvement over the third quarter 2010, and a 15.8% over fourth-quarter 2009 access line loss.

We continued to see a decline in outs or disconnect orders in both our 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 are pleased we have been successful in reducing our rate of line loss for the trailing 12 months ending December 31, 2010, to 7.6%, compared to a pro forma 8.8% trailing 12 months line loss a year ago.

One of the keys to this ongoing improvement in customer loss has been the performance in the top five Embarq markets.

We continued to see strong traction in these markets, and improvement continues to outpace the rest of the Company.

We also continued to strengthen our competitive position with partnerships, new product launches, and continued execution.

This morning, we announced our agreement with Verizon Wireless to offer Verizon wireless equipment and service plans to our residential and small business customers.

We are looking forward to later this year offering a complete product bundle to -- including wireless, to all of our customer base.

Our processes for selling DirecTV are now fully implemented, and we are seeing strong results, adding nearly 40,000 satellite and video subscribers in the fourth quarter.

We ended 2010 with almost 628,000 satellite video customers.

We also currently offer our CenturyLink Prism service in five markets -- Lacrosse, Wisconsin; and Columbia and Jefferson City, Missouri; and our newest markets of Las Vegas, Nevada, and Fort Myers/Naples, Florida.

We have exceeded our internal forecast for customer net gains this past year, and we are pleased with the progress we are making with our Prism TV service thus far.

The number of Prism capable households passed increased more than 60% in the fourth quarter, and we continue to expect to pass close to 1 million households by the end of this year.

We continued to expect to roll out Prism TV service in three additional markets in 2011, bringing CenturyLink's Prism TV to a total of eight markets.

In our Enterprise segment, we launched enhanced ethernet and are providing MPLS DIA and PRI zone pricing in a number of key markets.

In our Enterprise segment, we expanded our MPLS reach by completing a wholesale agreement with Qwest, and added key value-added capabilities to our ethernet product set.

Now this helps provide an opportunity for larger, multi-site MPLS sales, particularly through larger government, healthcare, and regional banking sectors.

Our operating model with local sales and operations depth, now coupled with national data capabilities, is enhancing our position in IP data network opportunities.

Now turning to slide eight.

We continue to face a number of challenges during the quarter, including a very competitive marketplace, a high unemployment economy, and all of the Embarq integration and pending Qwest merger planning activities we have in process.

However, we continued to generate strong cash flows for full year 2010.

Our operating cash flow, excluding nonrecurring items, was approximately $3.62 billion in 2010.

Our full-year 2010 free cash flow was nearly $1.63 billion.

Our strong cash flows continued to support the return of cash to shareholders.

We paid $220 million in dividends to shareholders during the fourth quarter, and $878 million in dividends during the full year of 2010.

Our strong cash flow supports the continued payment of dividends to shareholders, and our 54% payout ratio continues to be one of the lowest in our industry.

Turning to slide nine, we continued to make great progress toward completing the integration of Embarq.

Our fourth market conversion, which will be all customers in the state of Florida, is scheduled to occur by the end of the first quarter.

We also remain on schedule to complete the fifth and final Embarq customer billing conversion by the end of third quarter of this year.

We have completed the migration of Embarq long-distance customers, representing 400 million minutes of use per month to the CenturyLink IP network; which eliminates, of course, third-party carrier costs for the Company.

And we continue to see improvement in urban market operating results, and we are consistently meeting our synergy targets.

So we're pleased -- continue to be pleased with the Embarq integration.

Now moving to slide 10, we continue to move steadily ahead with approval process and integration planning work for our pending acquisition of Qwest.

To date, we've received 18 of 22 regulatory commission approvals required to complete the merger.

We continue to work with the main four regulatory commissions and the Federal Communications Commission on remaining approvals.

While it is difficult to predict the timing of these remaining regulatory approvals, we currently expect to receive all required regulatory approvals by the end of the first quarter.

Therefore, we are currently planning for an April 1, 2011 close and the launch of our combined Company.

Of course, we do not control the regulatory process; and therefore, the close date could be moved out if the remaining approvals take longer than we currently anticipate.

We continue to make good progress in the organization design and planning of the many integration activities required to integrate the new companies.

Organization design is complete.

Employee selection is now underway, and we should be substantially complete with those in the next few weeks.

At this time, I will turn the call over to Stewart for additional financial highlights and a review of our 2011 guidance.

Stewart?

Thank you, Glen.

During the next few minutes, I will review some of the highlights of our fourth quarter 2010 operating results, and I will conclude my comments with a discussion of the 2011 guidance provided in our earnings release issued earlier today.

Turning to slide 12, I want to begin by reviewing with you a few significant nonrecurring items that occurred during the fourth quarter.

And then, I will discuss the fourth-quarter normalized results.

First, we incurred approximately $27.2 million of pre-tax expenses, or about $0.05 per share, related to the integration and severance costs associated with the Embarq integration.

Second, we incurred about $7.1 million in pre-tax transaction and integration costs, or about $0.02 per share, related to the pending Qwest acquisition.

Third, we had a pre-tax curtailment gain of $20.9 million, or $0.04 per share, associated with freezing our defined-benefit pension plan and related future accruals.

Last, we had other net tax benefits that collectively amounted to about $0.01 a share.

In the aggregate, these items represent the $0.02 per share difference in normalized diluted earnings per share of $0.76 and GAAP diluted earnings per share of $0.74.

Turning to slide 13, this slide reflects our results for fourth quarter 2010 compared to fourth quarter 2009, excluding nonrecurring items for both periods, as outlined in our financial schedules.

For fourth quarter 2010, operating revenues decreased $118 million to $1.72 billion, from $1.84 billion in fourth quarter a year ago.

Our cash operating expenses decreased $38 million from $895 million in fourth quarter 2009, to $857 million in fourth quarter 2010, primarily due to synergies achieved from the Embarq integration.

Depreciation and amortization expense increased from $356 million in fourth quarter 2009, to $365 million in fourth quarter 2010, primarily due to depreciation associated with increased plan in service that more than offset the decline in amortization under the declining balance method for our Embarq intangibles.

Net income attributed to CenturyLink for the quarter was $232 million, compared to $287 million in fourth quarter 2009.

And diluted earnings per share for the quarter decreased to $0.76 from $0.95 in the fourth quarter a year ago.

The percentage decline in net income is higher than the percentage decline in operating cash flow, due primarily to the smaller denominator.

This year-over-year decrease in net income and earnings per share is due to the anticipated revenue declines we've discussed with you throughout this year, and the challenge of reducing costs in the near term, due to the pending Qwest merger and the expansion of IPTV service to additional markets.

Completing the successful integration of Embarq and planning for and achieving a successful integration of the pending Qwest merger are two of our primary focus areas.

Additionally, we are incurring start-up expenses as we expand the offering of our IPTV service to additional markets, and as we expand our high-bandwidth service offerings to enterprise customers.

While the merger integrations and these product expansions impact our operating costs in the near term, we are confident that these represent investments in the future success and growth of CenturyLink.

Finally, our free cash flow increased 2.5%, from nearly $334 million in fourth quarter 2009 to $342 million in fourth quarter 2010, due to lower capital expenditures in the quarter.

Moving to slide 14, I would like to discuss our 2010 results compared to our previous full-year 2010 guidance.

First, operating revenues declined by 6.5% in 2010 compared to pro forma 2009 operating revenues, compared to our previous guidance of an anticipated full-year revenue decline of 6.5% to 7%.

Second, we generated $1.6 billion of free cash flow for 2010, compared to our previous guidance of $1.58 billion to $1.62 billion.

From a diluted earnings per share standpoint, the $3.39 per share we achieved for full year 2010 is at the high end of our latest guidance of $3.36 to $3.46 per share.

Finally, we invested $864 million in capital expenditures in 2010, which is within our prior guidance of $825 million to $875 million.

The capital that we invested in 2010 included the enablement of high-speed Internet service, IPTV in several markets, expansion of ethernet availability, and fiber to the tower.

Our 2011 capital investments will continue to focus on these areas, which will enable future growth.

Now turning to slide 20, our 2011 guidance excludes the effects of nonrecurring items; integration expenses associated with the Embarq acquisition; transaction and integration expenses associated with the pending Qwest transaction; any changes in operating or capital plans; any changes in regulation; and any future mergers, acquisitions, divestitures, or other similar business transactions.

For full-year 2011, CenturyLink expects operating revenues to be 4% to 5% lower than 2010 operating revenues, as revenue increases associated with growth and high-speed Internet are expected to be more than offset by revenue declines associated with lower access revenues, reduced universal service bundling, access line losses, and other items.

Additionally, due to anticipated revenue growth associated with the expansion of CenturyLink's Prism TV service, the revenue impact of the expected continued improvement in the rate of access line loss and the effects of additional fiber investment, we expect the year-over-year rate of revenue declines to -- excluding the Qwest transaction and any other nonrecurring items that may occur, to be in the 2% to 4% range by fourth quarter 2011.

The Company currently expects 2011 capital expenditures to be approximately $1 billion, or 16% higher than 2010 capital expenditures of $864 million.

The increase is primarily due to planned incremental fiber to the tower investment.

We expect the Qwest transaction to close on April 1.

Therefore, we are not providing full-year 2011 free cash flow earnings per share guidance.

However, we are providing guidance regarding several items that collectively are expected to negatively impact 2011 diluted earnings per share by $0.49 to $0.55.

Items that are anticipated to positively affect 2011 diluted earnings per share are -- expected synergies associated with the Embarq acquisition in the $0.09 to $0.11 range; increased revenues associated with expected growth in high-speed Internet customers, $0.10 to $0.14 per share; increased revenues associated with data transport for wireless carriers, $0.06 to $0.08 per share; and anticipated lower interest expense in the range of $0.05 to $0.07 per share.

The following items are expected to negatively impact 2011 diluted earnings per share -- lower voice-related revenues, primarily due to anticipated access line losses of 7% to 7.5%, in the range of $0.40 to $0.45 per share; lower access revenues, primarily driven by access line losses and continued pressure on access minutes of use, $0.18 to $0.22 per share; start-up losses associated with the expansion of CenturyLink's Prism TV service, $0.12 to $0.14 per share; reduced interstate universal service funding, $0.05 to $0.06 per share; and expected migration of network traffic from a wireless carrier customer, $0.05 to $0.07 per share.

For the first quarter 2011, CenturyLink expects total revenues of $1.68 billion to $1.7 billion, and diluted earnings per share of $0.66 to $0.70.

The decline in first-quarter diluted earnings per share, compared to fourth quarter, is primarily due to continued decline in access lines, access minutes, the normal annual adjustment to USF revenue, increased payroll taxes, and the continued expansion of IPTV.

Now turning to slide 16.

Finally, as we outlined in our press release this morning, there are several items I want to briefly discuss regarding the accounting rules for business combinations that you will want to consider when building a financial model for the combination of CenturyLink and Qwest.

None of these items will impact cash flow.

First, purchase accounting rules require that the debt of Qwest be adjusted to fair value at the time of the merger close.

Based on Qwest's outstanding debt as of December 31, 2010, the impact of this fair value adjustment would have decreased interest expense for pro forma full-year 2011 by approximately $287 million, compared to the expected levels, absent the fair value adjustment.

Second, deferred revenues and related deferred costs on Qwest's balance sheet must be assigned a fair value.

We currently anticipate the fair value of the deferred revenues and related costs to be assigned minimal to no value.

Therefore, as of December 31, 2010, we expect -- we estimate that pro forma 2011 revenues would have been negatively impacted by approximately $140 million, and that pro forma 2011 operating expenses will be reduced by approximately $100 million.

Third, the tangible and intangible assets of Qwest must be reflected on the books of the combined company at their fair value.

The fair value assignment may significantly impact depreciation and amortization of the customer base; however, the impact cannot be determined at this time.

Finally, the merger will result in the elimination of approximately $70 million of annual revenues and corresponding expenses related to arm's length business relationships between CenturyLink and Qwest today, that will become inter-company transactions and subject to elimination following the merger close.

This concludes our prepared remarks for the day.

At this time, I will ask the Operator to provide further instructions for the question-and-answer portion of our call.

Thank you, sir.

(Operator Instructions)Our first question comes from Dave Coleman.

Thanks a lot.

Just a couple questions.

Glen, I believe you mentioned in that the fourth quarter, there was higher overtime and labor expenses.

Can you just quantify how much that impacted 4Q SG&A?

I believe that's where it would be allocated.

And then, secondly, your revenue guidance for 2011 implies about a $30 million step-down in the first quarter from 4Q 2010, but an equivalent amount decline over the subsequent three quarters.

So, I was hoping you would be able to walk through the items that will cause that change in revenue trajectory through 2011.

And then, final question -- you outlined a number of items that will impact 2011 EPS versus 2010.

Of that $0.49 to $0.55 adjustment or impact to 2011 EPS, how much of that would you say is a continuation of 2010 run rates versus new items in 2011?

Thank you.

I will take the first one.

It's -- I'll get Stewart to take the last two.

Regarding the fourth quarter, high overtime contract labor, that's about $10 million impact in the quarter from those expenses.

And Stewart, you want to talk about the revenue guidance?

Yes.

Just in terms of revenue guidance, the $30 million decline that we anticipate in the first quarter compared with (inaudible) quarter, about $7 million of it relates to the decline in universal service fund receipts that we received -- which, again, is related to the normal adjustment that's made at the first of each year, based on the nationwide average cost per [local loop].

We additionally, in terms of (inaudible) long-distance declines in revenue, as well as network access and just basic (inaudible) revenue, is about $15 million or so from the fourth quarter to the first quarter.

So, that makes up the majority of the declines [that we'll see] from fourth to first.

In 2011 versus 2010, the EPS items, in terms of how much is a continuation -- basically, the items that impact the decline in revenues related to universal -- access line declines and minutes of use, basically are items that do just continue from 2010 to 2011.

We'll continue to see declines in those items.

They are new declines.

They're not just carryovers, basically.

So, there's really not very much in terms of carryovers.

There are a few items, in terms of the wireless carrier that's migrating traffic off of the Embarq network, as well as some database look-up revenue that Embarq had, and that's probably in the neighborhood, combined, about $15 million or so.

$15 million to $20 million.

Okay, great.

And just one question on Prism IPTV.

In the three legacy or older markets, can you say what the market share that you have at that point -- at this point?

These are relatively new markets, Dave.

We really -- we haven't disclosed that by market.

In the market we've been in the longest, I'll just say that [take that one down] about 20% margin share, right now, in the market, we've been there the longest.

That's great.

Thank you.

Thank you.

Our next question comes from David Barden.

Thanks for that revenue detail there, Stewart.

It's helpful.

Could we also get the one-time revenue contributor to the fourth quarter?

And also, just again, with respect to that first-quarter guidance, it seems like if you do the math on the earnings versus the revenue change, it seems like more than 100% of the revenue change is dropping down to the pretax line.

So, not only is all the revenue dropping out of the EBITDA line, but more.

So, could you kind of help us understand what's going on here?

Because I'm not sure we've seen, ever, more than 100% of the revenue come out of the Company in a single quarter of this magnitude.

And then, the second question was just related to the Verizon -- sorry, the tower fiber investment, which is a big incremental step-up, a big investment on your part.

Presumably, it's not a speculative investment.

Could you kind of give us some more details about the economics around the returns on that money?

Thanks.

In terms of -- let me get the second question first.

The first quarter to fourth quarter -- basically, the further decline in EBITDA is really due to expense increases that we'll see in the first quarter.

One, we have about $10 million of increased costs associated with payroll taxes, basically starting over at the beginning of the year.

And then, secondly, we have some additional costs, probably about $10 million of an increase, fourth to first, related to the continued rollout of the IPTV service.

In terms of one-time revenue items to the first quarter, we had about $8 million of negative adjustments in total -- positive adjustments, I'm sorry, $8 million of positive adjustments in total, in the fourth quarter.

Dave, this is Glen.

On the fiber to the cell investment, these are not speculative investments.

And virtually all of these investments will have five- to seven-year -- mostly seven-year contracts on these, that will guarantee our revenue streams and our returns with that period of time, basically.

All right, guys, thanks a lot.

Thank you.

Our next question comes from Scott Goldman.

Couple questions.

Just wanted to stay on the fiber to the cell investment that you have there.

Wonder if you could put a little bit more parameters around how much of the incremental spend you guys are doing in 2011 is really related to that fiber to the tower, how many towers, and kind of what a cost per tower might look like, to help us think about that.

And then, is this really kind of like a Qwest-like build, where you can leverage that to bring fiber into more residential and business customers as well?

And then, I have a follow-up after that.

As far as incremental spend, virtually all of the incremental spend over the last year, if you take the -- $865 million, is all fiber to the cell, basically.

And, if you look at the number of cells, we'll be building probably close to 3,000 cells this year.

Cost per cell is in the $60,000 to $75,000 range, something like that.

So, that's to give you a range of what we're spending there.

That's very helpful.

I appreciate that.

And then, just a follow-up in terms of the IPTV, maybe you can give us a little bit more detail around what you are seeing in those markets, in terms of the rate of line loss versus non-IPTV markets, and how the economics have been scaling as you enter new markets there.

And then, maybe a little bit better timing in terms of -- it sounds like Stewart said about $10 million of IPTV costs in the first quarter.

If I did my math right, we're looking at probably about $65 million for the full year.

So, is this a back-end loaded expense coming out of IPTV, or how does that ramp throughout the year?

Yes, you're right, in terms of the increased expenses -- the increased IPTV expenses in 2011 will be about $65 million or so, over and above -- cash flow, rather, impact on cash flow.

The impact on expense is probably about $85 million.

And how does that ramp throughout the year?

It basically -- I don't know, there's about a $10 million expense increase in the first quarter, and it will just ramp pretty much in a straight line from then through the end of the year.

Okay.

And any color, maybe, from Karen, in terms of access line trends or broadband attach rates in those markets where you do have IPTV, and how IPTV has been scaling?

In terms of the -- as Glen said, on the churn, it's a 400-basis-point improvement we continue to see there, attachment rate in the 90% range.

What I would say, too, in terms of -- it's still very early for us in these new markets.

And we're scaling in a controlled manner, meaning we turn up a node and we really kind of market in that node only.

We're [not] going after a master approach to make sure that we've got our processes constantly retuned.

Because as you bring new techs in to train, you want to make sure that those learning curves are accelerated.

But I would say, too, [the encouraging is] for us to be competitive in our markets, we need an IPTV facility-based product.

It's going to help with our end word.

So, if you just look at some of the new markets, 40% plus, 50% of our customers are new customers to CenturyLink.

So, that's very encouraging.

And we'll keep you posted as these trends change, as we bring more of these markets up and scale the business.

That's very helpful.

I'll just clarify -- Karen mentioned this, but we're seeing a 90% high-speed Internet attachment rate to the IPTV sales.

Okay.

Thanks, Glen, I appreciate that.

Thank you.

Our next question comes from Batya Levi.

I wanted to follow up on the guidance question.

I believe your outlook for revenue decline, especially the 2% to 3% decline by year end, is better than what the street is looking for.

When we put that along with the number of items you itemized that will hit EPS by about $0.50, you -- we could sort of back into it, margins we could see.

And it looks like we've seen the peak in the third quarter, and it's starting to trend lower, to below 50%.

Do you think this is a conservative guidance, or are there more cost-cutting opportunities that could drive them higher?

And a second question I had on the broadband side.

It looks like you expect broadband to be a larger contributor of earnings in '11 versus '10, but broadband and net adds look like they have stabilized.

So, can you talk about the pricing environment you're seeing there, and maybe some sense of what speeds customers are taking?

Thank you.

Yes.

Batya, I guess the first thing, the guidance will all change next quarter, once we're combined with Qwest and we start folding in synergies associated with Qwest.

I would say, though, that the margins really continue to decline somewhat, due to the continued rollout of IPTV, primarily during the fourth -- during the rest of the year, the remainder of the year, just on a standalone basis.

I might add, too, on the expense side of the impact on EPS, with anticipation of the Qwest transaction, we have not made cuts in costs that we will have normally, and that is having an impact, significant impact on our expense level.

So, we'll -- as we bring the Company together, we'll see more business as usual over the next coming months, and our costs with synergy will be in line, over time, with our revenues.

And on the speed, about 20% of our customers -- we are seeing an increase in take rates on the higher speed, about 20% of our customers are on up to like a 10-meg service.

But the bulk of them are between a 5 and a 1.5 -- or a 5 and a 1.5-meg service.

Okay, great.

Thanks.

Thank you.

Our next question comes from Simon Flannery.

Thank you very much.

Good morning.

I wonder if you could just touch on the deal with Verizon Wireless.

Is it a similar deal to the one that Qwest has already?

Any sense of what the timing looks like, and any cost from implementing that?

And then, you've had a couple of days to look through the [MPR rounds] from the FCC.

Any updated thoughts on the USF and inter-carrier comp proposals?

Thanks.

First of all, Simon, the Verizon deal is similar to the Qwest transaction.

We'll be able to sell all our products and services -- basically, all the platforms.

We think it's going to really enhance our ability to bring a full array of products -- a bundle, a full bundle, to our customers, including wireless.

As far as the costs, the costs will incur primarily our systems costs over time, as we bring the billing and begin to bill, will now bill the wireless -- the wireless portion of the bill.

But other than that, there's not a lot of costs, other than just training costs for our employee base will be the other costs we'll incur there.

As far as timing, we expect to begin selling the service in the next few months, next couple of months.

We should roll it out; and it will be, of course, expending that over -- for the rest of the year.

Regarding the proposed MPRM that the FCC released last week, really, it follows the national broadband plan.

It presents some opportunities and risks for CenturyLink and our rural customers, of course.

We need to remember, the MPRM is just a starting point.

It's not an order.

So there's much more work to be done within industry to build overall consensus around reform.

Obviously, the details and the manner in which the agency ultimately implements end reforms will be critical.

We continue to support our approach.

It includes a reasonable transition period, minimal customer rate increases, no unfunded mandates.

And we believe that we really, as a combined Company with Qwest, we'll be well-positioned to manage to any of the reforms that may eventually be enacted.

As you know, the MPRM reduces -- proposed to reduce access charges over time, but it also proposes to stabilize transition by harmonizing rates, reducing arbitrage, minimizing disputes.

It also proposes to create an offsetting revenue opportunity, provide access to USF support where it's needed, converts USF support from the voice to data -- high-speed data.

So, we expect a pretty consistent process here.

And although we -- certainly, this is always -- any time you see regulatory reforms, you have some concerns, the process is starting out about as well as we could expect at this point.

Thank you.

Thank you.

Our next question comes from Frank Louthan.

Great, thank you.

Can you give us a -- comments on what the enterprise trends have been?

What have you seen in some of your larger markets, from a business perspective, and the outlook for the year there?

And, with regards to the Verizon Wireless transaction, any deal there to lease some of your 700-megahertz spectrum, or what are your thoughts on utilization of that asset?

Thank you.

Yes, as far as enterprise trends, we're seeing businesses start to spend more.

We're not seeing a lot of new start-ups in the smaller, mid-size business area, but businesses are beginning to spend more.

We hope that we'll see that continue and expanded in the months ahead.

Our outlook, by the way, does not include a real change in the economy.

And one thing that we're doing is in -- we believe, positioning our Company really to take advantage of opportunities as the economy changes.

But over time, with the Qwest acquisition, especially, we believe the enterprise is a real opportunity for us as far as future growth and establishing CenturyLink as -- really, a nationwide enterprise Company.

As far as the Verizon deal, anything there to utilize our 7-megahertz there, is not at this point.

We -- of course, our 700 megahertz will represent with the Qwest deal a very small percentage of our total footprint, but we will begin some trials later this year.

We're going to be a fast follower to AT&T and Verizon on this -- on the 700-megahertz technology.

It's still not where it needs to be, but -- as far as we're concerned, anyway.

But we'll be doing some trials there, and it is -- it's obviously a really attractive service.

And it's a possibility that we could work with one of the other companies over time, to build out and to share spectrum in some way.

But that's a work in progress.

Okay, great.

Thank you.

Our next question comes from Tim Horan.

Thanks, guys.

A couple of questions.

And, sorry to focus on this again, but on the earnings front, the negative impacts from the -- primarily, in your guidance, coming from lower voice revenues and lower access revenues.

I would assume they're going build up throughout the year.

I guess what I'm puzzled at, is why would the earnings in the first quarter improve off of that first-quarter run rate?

I understand you will have the Qwest transaction, but is that the way that we should think about it, that this is kind of a good run rate, the first-quarter earnings for the rest of the year, absent the Qwest transaction?

Or should it even be declining off this first-quarter number, given the pressures that you're citing here?

And then, I had a couple of follow-ups.

Thanks.

Yes.

So basically, the change that you will see between second -- first and second quarter and on should be lower, because, -- again, what you're seeing in the first quarter is the initial step-down in USF for the year.

So that will be constant from now until the other three quarters.

And then, also, the wireless carrier that's transitioning the traffic, as well as the company that's using our database, that revenue will probably trail off over the next couple quarters or so.

So, the pressure for earnings should build up throughout the year?

So, the earnings, that $0.66 to $0.70, might be the peak earnings for the year?

It should decline off of that run rate?

No.

I mean, not necessarily.

It really depends on the expense control later in the year, and it depends on the revenue.

The reducing decline in revenue that we have projected in, and expense control, basically.

Okay, great.

USF, that will pretty much be flat for the year from now, and the same as it is first quarter.

Got it.

Great.

Maybe we can go offline on it.

On the wireless front, how many years do you think it will take to build out most of the towers in your territory?

And I guess, are you concerned at all, or having increased concerns, on wireless cannibalization at this point?

With the -- LTE speeds seem to be up around the 10-megabit kind of range.

And I guess, if you guys are essentially enabling that kind of rollout to the rural areas, what's to prevent that from cannibalizing the existing wireline broadband that you have out there now?

And, I guess, related to that, maybe you could just give us an update where your average broadband speeds are now for wireline, and where you think that can go.

Thanks.

First of all, the buildout -- within the next year and a half, we should have virtually the vast majority of the buildout complete.

So, it's not something that's going to go forever.

But midyear next year, we should be pretty well done with the vast majority.

And really, by the end of this year, the -- most of it.

By the end of the year, within a year and a half, have most of it done.

The -- of course, broadband substitution, LTE, we think there will be some of that.

But we're not really concerned with that as much, because just the demand on the carriers' network for the wireless data growth, it's (inaudible), I don't think they would want to pick up all the wireline data that's out there.

I think customers are very satisfied with the wireline speeds they have.

The pricing is competitive.

So, we don't have any real concerns on a broad scale that we'll see a lot of cannibalization by LTE in our networks.

And our average speeds are about 5 meg, I think, across the country.

So that's kind of what we're seeing, on average, as far as usage.

Thank you.

Thank you.

Our next question comes from Kevin Smith.

I noticed no cost savings in 2011 on the core business, other than the Embarq synergies.

Presumably, at 7% to 7.5% reduction in access lines, you'd be able to reduce headcount and other costs, even without Qwest.

Is this something we should be looking for in the Qwest merger synergies, or am I missing something here?

Well, we're not ready to talk about headcount, but I can tell you that the cost -- we realize that cost on a business as usual basis, when you see access revenues, USF revenues coming down, we have to match our costs with a revenue decline.

So, we are very cognizant of those requirements, and as we work through the Qwest transaction, the synergies there, we'll take the action required to really match our costs of where our revenue potential is.

We'll increase some investments and headcount in some areas; but at the same time, we'll reduce headcount and costs in areas where we are seeing reduced revenue.

So, that's -- we're -- that's always on our agenda here.

But you can't quantify today what those would be without Qwest?

No, we're not ready --

In a normal course -- not headcount, just overall OpEx reductions, to match the access lines?

Because obviously, the last couple of years, even without Embarq, you've taken down your OpEx at least ratably with your access line decline.

So --

Kevin, we're just not ready to talk about that today.

Okay, that's fair.

Thank you.

Our next question comes from Donna Jaegers.

Hi, guys.

Thanks for giving us all the details on the puts and takes for next year.

On -- can you give us a little more color on, first of all, the IPTV cost per home, what it cost to roll out, just ballpark?

And then, I was reading through your reports and everything, but I'm not seeing IPTV net add numbers or subscriber numbers or satellite subscriber numbers.

Can you give us that data, as well?

On the second question, we're just not giving out numbers because it's small, and just for comparative purposes, primarily.

As we get larger here in the next few months, we'll start giving those numbers.

But right now, we decided not to disclose close.

How about your satellite numbers?

Satellite, we can -- yes, we can give you the satellite numbers.

We're at about almost 15% penetration of our base, in total.

We added 40,000 during the quarter, and ended the year at 628,000 total [VBS] subscribers.

Great, thanks.

And then, on -- and obviously, it's too early for IPTV.

On your Verizon Wireless agreement -- Qwest said earlier on the iPhone, they don't get it right away.

That would be the same sort of agreement you would have, I guess, on getting the iPhone from Verizon Wireless?

Yes, we -- this is Karen.

We expect to have, really, access to all the phones that Verizon offers; not only the iPhone, but the BlackBerry and Android, all those important elements.

Just not one phone, but the array of phones that they offer.

Including the iPhone.

Yes.

Thanks, Karen.

Thank you.

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

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

Glen Post for any closing remarks.

In closing, CenturyLink continues to build on our solid results we have achieved over the last year, since closing the Embarq transaction.

We achieved solid results in the fourth quarter of 2010.

We continued to slow the year-over-year rate of access line loss, and drive revenue growth from strategic products and services.

Our local operating model, combined with our strong product portfolio and targeted marketing efforts, continued to be effective in driving results.

Also, our employees continue to do an outstanding job of serving our customers, while simultaneously integrating Embarq operations into our Company and preparing for the Qwest acquisition integration.

Work on the Qwest transaction approval process and planning for the Qwest integration are going well.

And I am very confident in our Company's ability to execute our business plan in the months ahead.

Thank you for participating in our call today.

We look forward to speaking with you again in the near future.

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.