Lumen Technologies Inc (LUMN) 2011 Q2 法說會逐字稿

Good day, ladies and gentleman and welcome to CenturyLink's second quarter 2011 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.

Sir, you may begin.

Thank you, Operator.

Good morning everyone.

We apologize for starting a few minutes late and appreciate your patience.

We welcome to our call today to discuss CenturyLink's second quarter 2011 results released earlier this morning.

Unless otherwise noted in the press release, or in our remarks and related materials this morning, the second quarter results discussed in the press release and during this call relate to CenturyLink Inc.

including Qwest effective for the full quarter but excluding Savvis.

Savvis results for second quarter 2011 are addressed separately in the release and our prepared remarks for today.

Savvis is only otherwise included in the 2011 outlook information provided for full-year 2011 and pro forma full-year 2011.

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.

Turning to slide 2, it 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 integration of Embarq, Qwest, and Savvis and other outlooks in our business.

We ask that you review our disclose found on this slide as well as 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.

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.

Reconciliation 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.

Now, turning to slide 3 the participants for today, 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 August 9, 2011 and accessible for webcast replay through August 23, 2011.

And for anyone listening to a taped or webcast replay of this call or for anyone reviewing the written transcript of today's call, please note that all information presented is current only as of August 3, and should be considered valid only as of this date regardless of the date listened to or viewed.

So as you turn to slide 4, I'll now turn the call over to your host today, Glen Post.

Glen?

Thank you, Tony.

We appreciate you joining us today as we discussed CenturyLink's second quarter 2011 operating results, as well as selected operational updates and 2011 guidance information.

We delivered solid financial and operational performance for the second quarter 2010 including revenue inline with our guidance range and improved access line trends.

Our second quarter 2011 results are significantly impacted by non-cash accounting charges resulting from purchase price accounting for the Qwest transaction.

These charges significantly impact our net income and earnings per share as depreciation and amortization increases as we amortize the value assigned to the Qwest customer base.

However, it's very important to note that the purchase price accounting adjustments have no impact on the cash flow to the Company.

And also, the accounting adjustments do not in any way affect the economics of the Qwest acquisition.

We continue to believe the Qwest transaction is a great strategic combination and improves the growth characteristics of our combined Company.

Initial Qwest integration efforts are underway and we have now implemented our local operating model in the legacy Qwest markets.

Synergy achievement in the second quarter is inline with our expectations.

In addition, on August 9 we expected the launch of CenturyLink brand into Qwest markets.

Also the final Embarq conversion was completed in late July, marking the end of all major integration activities associated with that transaction approximately 25 months following the close.

We have a couple of smaller systems conversions left, but the vast majority is now done.

And we're on track to achieve the target of $375 million in annual run rate synergies later this year.

Additionally, we are pleased to welcome Savvis at CenturyLink family following the close of transaction with them on July 15.

Now moving to slide 5 in the deck, I'll cover some financial highlights for the quarter.

We achieved operating revenues of $4.4 billion for the quarter ending the lower end of our guidance range for strategic revenue growing by 6% and legacy revenue declining 10.5% as compared with pro forma second quarter 2010.

Diluted earnings per share excluding special items is $0.44 per share, below our guidance range due to higher than anticipated amortization related to the business combination accounting of the Qwest properties.

Excluding this unexpected increase, earnings-per-share would be $0.64, and in line with our initial guidance range.

Excluding the impact of non-cash items, our cash flows remained strong as we generated $950 million of free cash flow during the quarter.

Strategic revenue growth of $98 million is driven by high speed internet, special access, and MPLS growth over the past year.

Now turn to slide 6, I'd like to cover a few operating highlights for the quarter.

During the second quarter, we added over 12,000 high speed internet customers, demanding legacy CenturyLink markets margins were solid and we achieved higher year-over-year inbound sales in the legacy Qwest and CenturyLink markets through the second quarter compared to pro forma second quarter 2010.

However, the strong inbound performance was offset by higher than anticipated churn of stand alone high speed internet customers in the legacy Qwest markets.

We have taken steps through competitive bundles and save offers to mitigate this churn, which we believe will improve next broadband additions in the coming months.

We ended the quarter with approximately 5.43 million HSI customers, approximately 50.1% penetration of total addressable access lines.

As we mentioned on the earnings call last quarter, CenturyLink and Qwest have different methodologies for accounting access lines and the chart on this slide reflects the methodology adjustments to a standardized CenturyLink and Qwest subscriber counts.

On a combined basis, we continue to see improvement in our rate of access line decline, as we continue to focus on new customer acquisitions by targeting the non-customer base as well as enhancing our retention programs.

Our second quarter line loss of approximately 300,000 represents an 18.6% improvement over pro forma second quarter 2010 access line loss.

We continue to see a decline in disconnect orders in both the consumer and business segments, but we're not seeing much incremental business activity in our markets this year.

We are pleased that we have been successful in reducing our rate of line loss for the trailing 12 months to 7.4%, a reduction from our pro forma trailing 12 month line loss of 8.2% in the second quarter of 2010.

One of the keys to this ongoing improvement in customer loss has been the performance in the top 5 Embarq markets.

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

We continue to see solid results in DirecTV sales, we added more than 14,700 satellite video subscribers in the second quarter.

We ended the quarter with nearly 1.7 million satellite video customers.

Our Prism services are available in a total of 8 markets now.

We expect the number of Prism-capable households to reach close to 1 million households by the end of this year.

During the second quarter 2011, high speed internet product attachment to our Prism service was at 91% and voice attachment was 79%.

We are pleased with the overall progress we're making with Prism TV service thus far this year, and we expect continued success in the months ahead.

We also see continued success in driving broadband penetration in our success in both satellite video and Prism TV sales, improved consumer residential average revenue per unit by about $2.18 at 4.3%, to $53.29 in the second quarter 2011, over the second quarter of 2010.

And finally, we launched Verizon Wireless in the second quarter of this year.

We launched first to small businesses early in the quarter and in the process of a phased rollout to consumers on a CenturyLink side, across retail and call centers, we do have access to the full suite of Verizon services and handsets and look to grow this as an important part of our bundle along with the voice, high speed internet and video products.

As previously disclosed during the second quarter, we began segment reporting for our 3 major operating groups; regional markets group, business markets group and wholesale markets group.

On slide 7, I'll briefly review some highlights from each of these segments and later Stewart will walk you through the financial performance by segment.

Starting with the regional markets group, or RMG, we implemented our local operating model organization across the legacy Qwest markets effective April 1, and we're receiving positive feedback from customers and employees as a result of this implementation.

Also high speed Internet sales trends were higher.

However we did experience higher than anticipated churn of stand-alone broadband in the legacy Qwest markets as a mentioned earlier.

We have implemented bundle and save strategies to mitigate this churn, expect to see improvement in the coming months.

RMG strategic data sales; that is, ethernet, BIA, MPLS, and voice over IP continue to post strong growth trends.

2011 strategic revenue is up 6.2% year-over-year.

Additionally, sales productivity in the small business market improved due to the targeted bundle offerings.

And response rates were up 16% with our new go-to-market sales efforts.

Moving to our second segment, business markets group, or BMG; we're encouraged by improving sales trends with average MRR, or monthly recurring revenue, up 9% year-over-year.

Second quarter 2011 was up 3.2% from first quarter '11, and this follows the first quarter '11 over fourth quarter '10 increase of 2.8%.

MPLS revenue grew 11% year-over-year, and we continue to have success acquiring large multi-location networks in the commercial enterprises space.

We are expanding our customer-facing sales capacity by adding front line sales professionals across the country.

We've also experienced strong performance in retaining existing customers with total contract value renewals in second quarter '11 up 23% from the first quarter of 2011.

We continue to leverage our expanded access footprint of the new combined Company.

Also, metro ethernet expansion continues, an ethernet private line product that's seeing strong customer acceptance with our enterprise customers.

Turning to slide 8, a few highlights regarding our wholesale markets group, or WMG; we continue to see strong demand from wireless providers for increased bandwidth which continues to drive our fiber-to-the-cell efforts.

This wireless bandwidth demand has provided a positive impact on our special access revenues, but we do anticipate these revenues to flatten somewhat in the second half of the year, as wireless carriers migrate away from traditional connections to DS-1 to fiber-based ethernet connections.

Basically, we will cannibalize some of our special access and cell tower revenue, but expect ethernet revenue to grow in the future as demand is driven higher by the growing broadband traffic.

Turning to slide 9, we completed a fifth and final customer billing conversion in late July which included customers in 11 states and now have all retail Embarq customers on CenturyLink systems.

We're pleased that we were able to complete the major Embarq integration activities within approximately 25 months following the close at the short end of the 24 to 36 month integration range we originally anticipated.

And we continue to meet our synergy targets and are on track to achieve our expected $375 million in operating expense synergies by year-end 2011.

On the Qwest side, we substantially completed the organization designed for the combined Company, by the end of the second quarter, and we remain on track to complete the conversion of Qwest financial and human resources systems to our SAP platform by year-end.

Additionally, network grooming activities are underway, which will continue over a number of months in the Qwest markets.

We achieved $70 million in synergies during the second quarter, driven by corporate overhead reduction.

And network alignment activities continue to expect to achieve $80 million to $100 million in operating expense synergies in 2011.

And we expect to exit 2011 at an annual run rate of approximately $190 million to $200 million of synergy level.

We continue to expect to achieve operating expense synergies of $575 million over the next 3 to 5 years, and capital expenditure synergies of $50 million over the next couple of years.

We turn to slide 10.

We completed the acquisition of Savvis on July 15 and it will operate as a separate business unit and will be headquartered in St.

Louis.

We believe the combination of CenturyLink's network and hosting assets with Savvis' assets will provide an exciting new platform that will enable us to capture growth in managed hosting cloud-computing and co-location businesses.

The CenturyLink-Savvis, combination really is about growth.

Together we'll create a premiere -- we do create a premiere managed hosting and cloud provider with global scale.

And based on 25% growth in the hosting business, we expect revenues of approximately $1 billion for 2011 and operating cash flow of approximately $275 million.

So overall, the Savvis transaction makes a strong strategic sense and operational sense for our Company.

With that, I'll turn it over to Stewart for comments on our financial results.

Thank you, Glen During the next few minutes I'll review some of the highlights of our second quarter 2011 operating results, and we'll conclude my comments with a discussion of 2011 guidance, provided in our earnings release issued earlier today.

Turning to slide 12, I want to begin by reviewing with you a couple special items that occurred during the second quarter, and then I'll discuss the second quarter normalized results.

First, we incurred approximately $245 million of pre-tax expenses or about $0.26 per share related to integration, severance, and retention costs associated with the Qwest integration.

Second, we incurred about $25 million in pre-tax integration and severance costs or about $0.03 per share related to the Embarq acquisition.

And $2 million in pre-tax transaction integration costs related to the Savvis transaction.

These special items were offset by favorable settlement of an operating tax issue of $12 million or $0.01 a share.

Non-operating items include bridge facility costs net of interest on the settlement of an operating tax issue and the tax benefit from reduction of an NOL valuation allowance, which together accounted for about $0.01 a share as well.

In the aggregate, these items represent the $0.27 per share difference in normalized diluted earnings per share of $0.44 and GAAP diluted earnings per share of $0.17.

Now turning to slide 13, this slide reflects CenturyLink's results for the second quarter 2011 compared to pro forma second quarter 2010, excluding special items for both periods as outlined in our financial schedules.

Please note that the information on this slide includes Qwest's results for second quarter 2011 and pro forma second quarter 2010 as if the Qwest merger occurred as of January 1, 2010.

The final column, titled actual 2010, does not include the Qwest results and really includes the as-reported results.

For second quarter 2011, operating revenues decreased to $4.4 billion from $4.6 billion in pro forma second quarter a year ago.

The decrease in revenue resulted primarily due to growth in strategic revenues, driven by growth in HSI, high speed Internet customers, and data services and transport demands being more than offset by decrease in legacy revenues due to continued access line losses and lower access revenues.

Cash operating expenses decreased from $2.6 billion in pro forma second quarter 2010 to $2.5 billion in the second quarter of 2011.

Depreciation and amortization expense was virtually flat from $1.195 billion in pro forma second quarter a year ago to $1.198 billion in the second quarter of 2011.

These figures included the non-cash impact of business combination accounting from assigning the fair value to Qwest properties, including the customer list in both periods.

Net income for the quarter was $262 million compared to $302 million in pro forma second quarter a year ago.

And diluted earnings per share were $0.44 second quarter of 2011 and $0.51 in the pro forma second quarter a year ago.

Excluding the impact of higher than anticipated depreciation and amortization expense associated with the preliminary assignment of fair value and depreciable life to Qwest property and intangible assets, again primarily the customer base, second quarter 2011 earnings per share would have been $0.64.

Our free cash flow increased from $876 million in pro forma second quarter 2010 to $950 million in the second quarter of 2011.

So an increase in free cash flow from quarter-to-quarter.

Our free cash flow definition is defined as net cash provided by operating activities, excluding special items, less capital expenditure's.

In addition, there's 1 item that I'd like to point you to in the actual 2010 results compared with the second quarter 2011 results.

Basically, regarding our operating cash flow, as it more than doubled in the second quarter 2011, resulting in a 4.6% increase in operating cash flow per share to $3.20 per share in the second quarter of 2011.

As Glen mentioned earlier, turning to slide 14, we now report 3 operating segments.

In total, regional operating margin revenues declined $117 million or 4.9%.

Strategic revenue grew $40 million or 5.8% from pro forma second quarter 2010, driven mainly by high speed internet customer adds as well as growth in other revenues.

Legacy revenue declined $150 million or 9.1% from pro forma second quarter 2010, as access line losses continue to impact local and long-distance revenues.

Our data integration revenues declined $7 million or 17.5% resulting from lower CPE sales.

Segment expenses declined $40 million or 3.9% year-over-year, primarily driven by reductions in employee costs as well as marketing expenses.

Turning to slide 15, business markets group.

Overall, BMG revenues declined $39 million or 4.1% from pro forma second quarter 2010.

In the second quarter 2011, strategic revenue represented almost 48% of BMG revenues and grew by $13 million or 3% to $442 million on the strong MPLS unit growth that Glen referenced earlier.

The strategic revenue increase was offset by legacy revenue decline from second quarter 2010 by $25 million or 6.5% to $362 million, driven by declines in local revenues.

Data integration revenues decreased $27 million or 18.6% to $118 million, primarily resulting from lower CPE sales.

Our total segment expenses in BMG declined $30 million or 5.2% to $551 million from second quarter 2010, driven mainly by lower employee costs and lower CPE sales.

Turning to slide 16, overall wholesale revenues declined $47 million from pro forma second quarter 2010, or 4.6%.

Strategic revenue grew $45 million which is 8.7%, primarily driven by special access and private line transport, resulting from increased sales of DS1's, DS3', and ethernet and fiber-to-the-tower.

Our strategic revenue represented almost 58% of total wholesale revenues in the second quarter of 2011, up from 51% in pro forma second quarter 2010.

Legacy revenue declined $92 million or 18.2% driven by access and long-distance declines; primarily resulting from competition, product substitution and lower minutes of use.

As expected, we also lost a few database customers that contributed to the decline as well.

Wholesale segment expense declined $6 million or about 2%, mainly driven by lower employee costs and access volumes and rate declines.

On slide 17, I'll briefly review Savvis' results from the second quarter.

Savvis generated revenue of $264 million, a 19% increase from the same quarter a year ago; driven primarily by strong managed services growth across key verticals of consumer brands, financial, and media.

Their operating cash flow excluding special items grew 31% from $48 million in the second quarter a year ago, to $63 million in second quarter 2011.

The operating cash flow margin excluding special items improved to 23.9% this quarter, which is actually 27% excluding non-cash comp, from 21.6% a year ago.

Now turning to slide 18.

Our 2011 guidance excludes the effects of nonrecurring items, integration expenses associated with the Embarq acquisition, transaction and integration expenses associated with the Qwest acquisition, as well as the Savvis acquisition, any changes in operating or capital plans, changes in regulation, and any future mergers, acquisitions, divestiture's or other similar business transactions.

Please note 2011 full-year guidance, the first column in the slide, reflects only CenturyLink results for the first quarter 2011, combined with CenturyLink and Qwest results for second quarter 2011 and combined CenturyLink, Qwest, and Savvis for the remainder of the year.

For full-year 2011, CenturyLink expects operating revenues to be $15.2 billion to $15.4 billion and diluted EPS to range from $1.60 to $1.70 per share.

Our capital expenditures will be between $2.35 billion and $2.5 billion and free cash flow of $2.9 billion to $3.1 billion.

For third quarter 2011, CenturyLink expects total revenues of $4.55 billion to $4.6 billion, diluted earnings per share of $0.29 to $0.34, and free cash flow of $1.88 billion to $1.92 billion.

Additionally, we expect fourth quarter diluted EPS to be within a similar $0.29 to $0.34 range, as a reduction in seasonal expenses should offset revenue declines.

The sequential decline in diluted EPS expected in the third quarter is primarily due to a decline in access revenues partially offset by an increase in high speed Internet revenue and again, seasonal increase in outside plant maintenance, which we experience every year.

Please note that on this slide, the second column entitled pro forma 2011, provides guidance as if Qwest and Savvis mergers were effective as of January 1, 2011, and the Company operated on a combined basis or the full-year 2011.

We expect that our dividend payout ratio in 2011 will be approximately 50% of free cash flow, assuming on a pro forma basis.

I want to do one thing for you, and that's reconcile the previous guidance that we gave -- a couple of items that we gave related to previous guidance, compared with current guidance on the pro forma 2011 amounts.

Our previous guidance for pro forma operating revenues -- and this basically included a full-year of CenturyLink as well as Qwest, but excluded Savvis -- was $17.6 billion to $17.8 billion.

Our current guidance has increased to $18.5 billion to $18.8 billion of revenue.

That guidance, however, includes Savvis.

So Savvis is a little bit over $1 billion of the increase, partially offset by about a $90 million decline in CPE that we expect currently, as well as other revenue declines of approximately $60 million.

And those are primarily in local rate changes that we made of the inmate business and other certain other items.

Also, to reconcile our pro forma diluted earnings per share.

The previous guidance, again including CenturyLink and Qwest on a pro forma basis for full-year 2011, was $2.55 to $2.65.

Our current guidance is reduced to $1.50 to $1.60.

Basically to reconcile the difference, about $0.78 of this is related to the purchase price amortization, or customer list amortization, that we discussed earlier related to the Qwest transaction.

About $0.20 of the decline is related to the Savvis acquisition, which basically the entire $0.20 there is related to non-cash items, depreciation, and amortization including amortization of their customer base.

About $0.03 decline related to CPE net of the revenue, net of the expected cost of CPE typically in the margin that we experience there.

And then the other revenue declines are about $0.06 a share.

So that kind of gets you from the midpoint of our previous guidance of $2.62 a share to the midpoint of our current guidance of $1.55 a share.

Turning to slide 19.

In the earnings released today, we included estimated impacts that the application of business combination accounting rules are expected to have on the combined Company's financial results for third quarter '11 and full year 2011.

Again, all of these items are non-cash.

And please see the earnings release and related 10-Q filing that we'll make this week for further information.

Regarding the capital structure and use of free cash flow, as we've stated, the Board will consider the use of free cash flow next year as we more fully realize the expected merger synergies and see further progress with the merging integration of Qwest and Savvis.

We've also indicated that maintaining investment grade credit metrics is important to us, and accordingly, we expect that during 2011 and 2012, we will reduce debt by between $1.5 billion and $2 billion.

And I might add that on a pro forma basis, we've reduced debt about $700 million this year, excluding the $2 billion that we borrowed associated with the Savvis transaction.

This concludes our prepared remarks for the day.

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

Thank you.

(Operator Instructions) And our first question comes from David Barden.

Hi, thanks for taking the questions.

And thanks, Stewart, for kind of doing that math.

So obviously, the stock came off pretty hard today because of some of the uncertainty around the trying to sort out what was Savvis and what was core business changes and what was going incrementally right.

So is the takeaway here that -- we're adding about $1 billion of Savvis revenue, that's a little conservative to relative to what the street was expecting for them to deliver for the year.

If you could comment on whether there are eliminations in that and whether you're just trying to maybe take a swing at being more conservative on that to be number one?

And then number two, it's sounds like if I look at these earnings per share impacts, it looks like you're taking about $50 million of kind of EBITDA out of the old guidance for lower CPE sales and some new contracts?

But at the same time, you're not really adding anything back for any potential improvement in integration for Savvis relative to that to $2.75 EBITDA number, which looks very much in line with the street.

So could you kind of reconcile some of the conservatism they you seem to be baking into the as Savvis outlook and you're kind of underlying estimates for the core business and how we should think about whether -- is this business getting better, or is this business getting worse?

Because I think that's what the market is trying to figure out, relative to what you told us last quarter.

Thanks.

So, David, let me take a shot at it, and come out back with a question if I don't completely answer you.

So on Savvis, our intent here is in no way as to really take down their guidance from what they'd previously given or from kind of where the street is on a consensus basis.

We do have about $1 million a month of revenue that will go away with respect to Savvis from adjustments related to revenue that they have deferred, probably 75% to 80% of that, so it also is deferred expense that'll go away as well.

And there is some minor eliminations between CenturyLink and Savvis that will occur, but nothing really significant.

So really, if you look at Savvis, again, we're not really -- their previous guidance was $1.03 billion to $1.06 billion off revenue, and we really feel very, very comfortable with the range, in fact really kind of the upper end of that range.

Also, with respect to their EBITDA margins, -- if you exclude the non-cash comp that they exclude and get to their adjusted EBITDA that they talked about previously, they were at about 27% in the second quarter, which is about where they expected to be.

So they really had a good quarter, there bookings were good, they're backlog of bookings continues to be strong, and that does not include any positive impact that we may get from the combination associated with any cross sell opportunities.

We've not built any of that in.

So that should pretty well covers Savvis.

In terms of -- why don't you reiterate the part of the question I haven't answered now, and I'll see if we can --

I guess, if we're feeling pretty good about Savvis and we're subtracting all of the higher end of the estimates of Savvis out of our core estimates for the existing guidance, it seems to suggest that, the underlying business just isn't doing as well as we thought it was going to a quarter ago.

And is your message that things just aren't going well?

Or are there some offsets here that we should be thinking about?

So the message basically from a revenue standpoint is that basically CPE revenues are going to be down compared with what we expected a quarter ago when we gave our pro forma 2011 guidance.

And the CPE declines will be from a revenue standpoint about $90 million, which equates to about $0.03 a share in EPS.

The reason it's down is associated with two things.

One, the government sales -- sales to the government agencies have been down, which basically we think is probably attributable to the budget issues that the governments have been going through.

Other CPE sales, we seem to be having as many sales as we've had in the past.

However, those sales seem to be at lower average amounts.

The sales folks are still selling CPE, they're still selling about the same number of transactions that they had a year ago.

It's just that the transaction sizes are down.

The other revenue declines of about $60 million or so, which really equates to again about $0.06 a share in EPS is really just due to, again, some rate changes that we've made to access rates, interest rate access, and also to local access line losses as well as minutes of use -- primarily minutes of use on the access side.

So I guess I'd have to say to sum it up, we're a little bit more -- we're coming off the guidance that we gave last quarter, slightly on our revenue and EPS.

But most of the revenue side really relates to CPE, most of the EPS side really relates kind of the legacy business, more or less, and legacy revenues.

And so I guess my last question is related to -- so the revenue slided a little bit more than we expected, but we didn't have what you are calling operating cash flow guidance before, we can't really compare whether your outlook for maybe the cost side of the equation is more optimistic relative to what your previous expectation was, because we can't compare what it was before to what it is now,.

Overall, are you optimistic about how your ability to track to these revenue, incremental revenue declines on a cost perspective can be done?

Or is this going to drop right down to the EBITDA expectation as well?

Well, some of that is really dropping down to the EBITDA expectations as well in the guidance that we're giving.

And one of the reasons we decided to give operating cash flow guidance is because we think that on a longer-term basis it will be easier for you guys to track that, and it doesn't vary because of -- like free cash flow does, because of changes in capital expenditures from quarter- to-quarter, things like that.

I think that we think we can reduce some of the expenses associated with the revenue declines, but I'm not saying that we can get all the way there.

So there will be some deterioration in EBITDA in the latter half of the year.

Thanks for the clarification.

Thank you.

Our next question comes from Batya Levi.

Hi, thanks.

I also have a question on the guidance.

First, just looking at the current guidance, excluding Savvis in the first half of the year, you're increasing it by about $300 million.

Savvis adds about $500 million.

You talked about a $150 million of pressure from CPE and other.

Can you talk about what's the remainder $140 million pressure would come from?

Also, looking at your prior guidance, you were thinking about exiting the year at about 2% to 3% revenue decline in the 4Q.

How do you think about that right now?

And if I look at your year-end guidance for revenues and guidance for third quarter, the implied guidance for 4Q actually looks for a nice sequential increase.

Can you talk about where that's going to come from?

Both on the revenue side and EBITDA side.

Thank you.

Okay.

Batya, I may have to clarify, but let me answer one part of the question first.

On the last call, we indicated that we felt like when we got to fourth quarter, our revenue decline fourth quarter of 2011 -- and this excludes Savvis -- would be about to fourth quarters 2010 on a pro forma basis would be about 3%.

With the additional revenue declines that we're building into the revised guidance, basically we now think that will be about a little less than 4.5%.

And the changes there, basically about a $70 million change, or increased decline, rather.

The CPE is $30 million of that, and again, that's lower margin revenue.

And other legacy revenue declines is about $40 million of that, and that's made up of just a combination of items.

So again, fourth to fourth now versus the 3% we talked about last quarter, we think it's more like 4.5%, but just about half of that is really related to CPE.

Did I get your question with that?

Because you said guidance excluding Savvis increased about $300 million now.

I'm a little confused with that part again.

$300 million is the increase in guidance.

But Savvis add about $500 million of revenues in the second half.

That's offset by $150 million pressure from CPE and other.

Where is the remainder pressure coming from?

Well Savvis is about $500 million in the last half of the year, and I guess what I've explained is about -- I think it's just rounding, Batya, to get to the $300 million.

Can you talk about the trends for 4Q?

Should we expect a sequential improvement, both on the revenue side and the EBITDA side?

We'll continue to see some decline on the revenue side.

But again, the decline on the revenue side will be offset by lower expenses, because some of the seasonal expenses that we typically occur in the third quarter will go away.

So again, on an EPS standpoint, we're expecting fourth quarter to be approximately the same as third quarter.

So the decline in expenses from third to fourth should pretty much offset any legacy declines in revenue that we've from third quarter.

Such that on an EPS basis, it should be neutral.

Okay.

Thanks.

Thank you.

Our next question comes from Simon Flannery.

Thank you very much.

Good morning.

Or good afternoon.

Glen, we talked about use of free cash flow and considering options next year as well as focus on deleveraging.

Do I take it from that, that you are unlikely to make any major acquisitions over the next 18 months or so?

Obviously, you've done a lot here in the recent past, but there's certainly questions out there about your interest in looking at other opportunities.

So if you could comment on your appetite for acquisitions, large or small.

And then, Stewart, just a clarification on the amortization changes.

I think you noted this is not final, just talk about any sort of potential volatility around that?

And also around just how that flows, 2011 to 2012 and beyond.

Is it a straight-line type amortization or is there an accelerated component?

Thank you.

Simon, regarding the acquisitions, right now our focus is really on integrating -- we've really completed now the Embarq integration for all practical purposes.

We're now focused on Qwest and Savvis and integration processes there.

And that's really what we're about right now.

We don't know of any large acquisitions, opportunities that we would be interested in out there to date.

So I don't think we'll be -- there's nothing that we know of at least that we'd be looking at.

It'd have to be something extremely attractive, extremely good price that would clearly drive shareholder value.

And don't know what that would be today.

So our focus right now is strictly on integration work and really executing our business plan.

Thank you.

And Stewart?

Yes.

Simon, with respect to the amortization -- so the actual amortization and depreciation in the second quarter was about $291 million.

And you can annualize that, but it will be declining somewhat, because at least where we are now, and again we're not final, we are using the sum-of-the-year business method to amortize the customer base that is allocated to the RMG Group and the BMG Group, but the wholesale -- the part that's allocated to wholesale we amortize in a straight-line at this point.

That may change, because we are still looking at this.

So about $7.5 billion was allocated to the customer relationships.

And again, we hope to have this finalized pretty much by the end of the third quarter.

But we have I guess until early sometime next year to get to finalized.

But we're working with the appraiser to try to get it final.

We felt like we had better information than we did at the end of first quarter when we originally gave our guidance on this, so we felt like though even though we weren't final, we really were able to reflect the most current thinking.

We don't think there'll be material changes for today.

But there probably will be some changes.

Great.

Thank you.

Thank you.

Our next question comes from Phil Cusick.

Thanks for taking the call.

I wonder if we can hit a couple of things.

First, on the Qwest high-speed losses coming, can you go into little bit what happened there and how you've addressed it?

Yes, Phil, I'll ask Karen to address for you.

Good morning.

In terms of the high-speed losses, what the situation in hand is that we have had good inwards.

However, we want to change the quality mix due to the commercial less stand-alones.

And what we're doing is we're rolling out some new bundling programs so we can improve our product attachment rate, because we all know that churn is better the more products attachment rate you have to a customer.

So essentially that's in a nutshell.

Okay.

So was there incremental competition during the quarter that you're now addressing, or was just this sort of steady and then --

No.

I would say from competition standpoint from a price point, not a lot of change.

There might be pockets here and there, but nothing extraordinary.

I would say from an advertising standpoint they did go hard after, the change, the conversion acquisitions -- not handing your customer off to an unknowing company like CenturyLink.

We've combated that with really good, I think, competitive positioning advertising and our brand advertising rolls out here in the next couple of weeks.

So other than that, there's not been massive pricing change.

It really is about the, stand-alone versus a bundled customer mix.

Okay.

And you said the marketing roles out in a couple of weeks.

The expectation for an improvement in the third quarter, is that been demonstrated so far, or is that's the expectation based on new marketing?

Actually, we're pleased with changes that we've make, in terms of looking at going after high propensity churn customers and adding products as well as our approach.

In terms of our new go-to-market that we rolled out, the response for our response rates are much improved when you look at sequential quarter-over-quarter.

So we feel good about that.

It's just the mix of the customer that we want to get more product attachment on.

Okay.

And then separately, can you talk a little bit about the Qwest enterprise business, you haven't really addressed that on the integration.

How are you thinking about as it relates to Savvis and then the rest of the business addressable market?

Thanks.

Phil, just one other thing Karen was saying, just a reminder that our gross sales increased year-over-year on HSI.

So it will return issue as we've talked about -- a competitive issue necessarily, as much a churn issue on the stand-alone HSI we expect higher churn and we real thought -- that's what happens with Qwest markets.

Regarding enterprise, enterprise remains steady during the quarter.

They actually increased quarter-over-quarter, a little higher in the second quarter than it was in the first, sequentially, as far as revenues.

We believe that the combination is really going to be strong with Qwest, cross-selling with Qwest and Savvis.

We've already begun customer business, a great amount of interest in the cloud product.

And with the Savvis customers, a great amount of interest in network capabilities that CenturyLink brings.

So we're very optimistic that we're going to see revenue synergies here.

Of course, we have not forecast any of those.

But in initial reviews with customers as well as our sales leaders, we're seeing a lot of optimism in what's expected there, so I think the combination as we expected with the network and the cloud product, hosting product Savvis brings is going to be very effective.

Okay.

Thanks.

Thank you.

Our next question comes from Scott Goldman.

Hi, good afternoon.

Also a couple questions.

I guess a different question on guidance.

If you look at your CapEx guidance, previous to current where the difference would really be in Savvis, looks like you're bringing guidance by about $250 million to $300 million, which I think is a little bit more than what Savvis was guiding for the full year.

So I wonder if you talk about what's involved with the CapEx increase beyond Savvis?

And within that, are there expectations?

Have you made any decisions on bringing IPTV into the Qwest markets?

You know, it's really pretty much rounding.

Maybe the guidance is up $50 million or so, related to the legacy CenturyLink.

But look at CapEx from Savvis, there's is basically up to $240 million or so, so it's pretty much rounding, I think, that's getting us.

So no change to the fiber-to-the-cell or IPTV plans from what you talked about previously?

No.

We're still in the midst of the fiber-to-the-cell and fiber-to-the-node programs.

Those are unchanged from our discussion last quarter.

We still expect to get fiber to about 6,000 cell sites this year.

We'll have additional cell sites that we'll build next year as well, as well as probably in 2013.

And fiber-to-the-node, we continue to be on track there.

I'll let Glen address any IPTV.

Just a little follow up there.

Probably the -- more capacity side on the Qwest markets, we see opportunities there to at add capacity that could generate revenue opportunities for us, so a little more aggressive there.

And a few markets where they've had partial build-out, and finish build-out in some markets.

So I think we'll be looking at additional capacity opportunities there for sliding and a $50 million increase or so there over what Savvis will bring to the table.

Regarding IPTV, as I mentioned earlier we're having good results in our markets overall.

For competitive reasons, we won't talk too much about what we're doing, but I do think we'll be looking to begin build-out in at least one Qwest market by year end.

Build-out IPTV probably like to rollout sometime next year, so that's kind of our view.

And again, to a great extent on a success base, we continue to see success in the CenturyLink markets, if we have the first build-out to Qwest, we see continued success.

There is demand in the market, there's no question, there's demand for this product in the market.

It's a quality product, we think it compete well with cable; actually our customers on our survey stated -- it's a better product than what cable has, in most cases.

So we're confident it's just a matter of plant situations, plant conditions, loop shortening opportunities as far as the economics of building out in the Qwest markets.

Okay.

And if I could just follow-up to Phil's question, just on the Qwest high-speed Internet churn -- I guess it just didn't make entire sense.

I understand you had good inwards, but you're seeing churn from these stand-alone broadband customers.

What would cause them to churn as you focus more on bundles?

Did you try and raise pricing on the stand-alone broadband to encourage them to move to bundles?

And that's what caused them to leave?

Or is it something else that caused that churn to pick-up there?

No.

If you just look at your churn, your profiles, your high-speed customer, it's a customer that has another product, say, a double-play or triple-play, or a stand-alone customer.

Your standalone customers just have a higher churn, 23 basis points higher.

And so therefore if you get a higher mix of your stand-alone, you're going to have more churn.

So our objective is to take those stand-alone customers, who are good customers, they just have higher churn, right, than a bundled customer.

And try to get them into a bundle.

But we have not done any price increases as such.

Okay.

I apologize for beating this one down, but so did churn within those customers pick up meaningfully from prior quarters?

And that's why we saw a bit of weakness in the HSI adds?

And if could you could give us any sense for what percentage of Qwest subscribers are stand-alone broadband subscribers?

We're not going to give you the percent, but yes, it was prior higher stand-alone sales prior to close.

And it does have higher churn.

So as Glen said earlier, our inwards this second quarter were strong.

It was more of a churn issue and the churn issue was caused by a higher mix of standalone than we anticipated.

Okay.

Thanks.

Appreciate it.

As well as promotions rolling off as well.

I think had something to do with it.

Okay.

Thanks, Stewart.

Thank you.

Our next question comes from Chris Larsen.

Hi.

Just wanted to follow-up on a couple things.

First, if I could characterize it, it seems like just of the EPS sheets, it's just that $0.09 that's operational.

And secondly, you gave some pro forma figures in the beginning, about 5% revenue declines.

Those pro forma figures, did those include the eliminations or is that 5% excluding the eliminations on a year-over-year decline?

Thanks.

Yes.

It includes the elimination, so it's basically what we would expect to report.

Okay.

And then you mentioned some price changes, some of it on minutes of use, but you also mentioned the inmate business.

What specifically was going on with the inmate business that you were lowering prices there?

Yes.

Not really lowering prices on the inmate side.

We had one competitive bit situation with a current customer that we had, that we lost, and expect to turn off in the second half of the year and transition to the new provider there.

The interstate rate access changes, that's really actually related to the approval process that we went through with respect to the Qwest acquisition, more of the states requiring us to reduce interstate access rates a bit.

Then lastly, a lot of the focus obviously is on things that seemed a little bit worse, but we did see that access lines got a little bit better.

What specifically, Karen, do you think is driving the improvement in access line changes?

Is it anything that you've done in the Qwest territories, or is this across the board or is it some better housing dynamics, perhaps in the old Embarq markets that are helping you with the access line decline, getting 80 basis points better than they were a year ago?

It's driven by better, just less out's.

Less outs?

From a go forward standpoint, that is our objective to improve the bundle with voice or other products, or video.

But right now it's just less out's.

The ins are still down year-over-year, but they're improving, but I wouldn't say a massive improvement there.

It's really about the disconnects being less.

I apologize, I said only one more, but I have one more question.

Stewart, you had said you're continuing with the fiber-to-the-node for the home build-out's in this Qwest territory.

Qwest had been doing about 1 million a year homes.

Is that still what you're targeting this year for fiber-to-the-node?

Yes, it is.

We're continuing with the program that they had.

Thank you, I appreciate it.

Thank you.

Our next question comes from Michael Rollins.

Hi, thanks for taking my questions.

First question I had was, can you talk a little bit about in the quarter maybe how the Qwest asset's did relative to the Century, just a little bit more depth?

And maybe a sense as you look at the revisions to guidance, it sounds like the access side was more on the Qwest side.

Is that true on the CPE front as well?

And then the other question I just had was with regards to the questions that you're wrestling with, in terms of finalizing the intangible amortization, just as I think back through a series of mergers that we've got to observe over the course of time, it seems like that's been -- once the deal is closed and the books are closed, it's become a pretty final number.

We haven't seen a lot of movement in what the companies have guided or produced once the deals closed on an intangible basis.

Is there something that's different or unique about your circumstances with the way the Qwest acquisition was structured, or the way the Savvis deal was structured, that's creating a little bit more of that uncertainty or question over what the final numbers will look like?

Thanks.

No, Mike.

Really, what we try to do is estimate the amount that would be allocated to customer base and the amortization to be pretty much inline with what we did with respect to Embarq and the way the purchase price was allocated.

And I guess, what we've subsequently found out after getting an appraiser in and going through the appraiser process with them, is it looks like the accounting professionals actually changed their process somewhat, because if you -- we've gone through and listed out a number of transactions that have happened over the last 3 or 4 years, and the amount allocated to customer base seems to be increasing from about 10% or so of the purchase price that we used in the Embarq transaction to about 30% to 35% of the purchase price in more recent transactions.

So I think that's basically what's happening there, so there's nothing structurally different about the Qwest transaction.

I think it's just more or less a change, it seems like, in the appraiser's approach to valuing the customer base.

I might talk a little bit about the synergy issue.

We anticipated -- we rolled out or talked about the operating synergy of $575 million, that was back in early part of 2010.

Over the past 12 months, Qwest of course took out a huge amount of cost out of the business between the time we were estimating our synergies.

We're still saying we'll hit our target in spite of all the cost they took out.

But it is, it's up a hill when they took out so much of what we had initially counted as synergies ourselves, they took that out of the business.

So we're confident we'll hit our synergy number, but they did a good job reducing costs over the last 12 months before we closed.

And with respect to the revenue decline, Mike, about half is really related to CPE.

Most of that is in the BMG side segment that basically sells to larger business customers, so that's where most of that CPE revenue decline is occurring.

The other legacy revenue declines are -- there's not much difference between the amount that we're experiencing for legacy CenturyLink and the legacy Qwest there, I'd say that's basically split pretty much equally.

And can you give us a recap of where you stand with the regulatory side, with high cost federal, USF, switched access, and then your cost of access in terms of try to understand what the implications of the reform proposal that you signed onto would mean for your financials over time?

Mike, I'll start out -- just basically we do support the plan.

We don't think the status quo is good for us or our customers.

The communications environment is changing rapidly.

The technologies shift, and evolving customer demands.

We think this is a good plan.

The plan that's been rolled out is not perfect, but it does represent a rational compromise proposal that we believe makes significant strides toward towards forming several critical elements that will ultimately be good for consumers and for the companies in the marketplace.

We'll make some meaningful short-term concessions, but we think ultimately they'll provide long-term stability, and predictability related to universal service cord and inventory compensation payments.

The transitions developing in the plan are aggressive, but we believe they are certainly manageable for us.

And the first of several steps to reduce switched access should begin and could begin in January.

It's true, but there is a phased-in approach.

And given the accelerating decline of interstate switched access, some of which we've talked about today already, as waiting for our guidance changing some -- we believe the transition really ultimately is being really needed as a stabilizer in minutes of use and in revenues going forward.

Did you want to address --

Yes.

And on the USF at switched access -- I'd have to go pull that to be specific -- but I think as I recall on a pro forma basis, USF and access was about 7% of total revenues.

And I think about 3% of that was USF, if I remember right, 4% access.

And you have a sizing of how much determination costs are that you pay?

I think the premise was that Qwest was in a significantly different position on the inbound versus outbound of terminating access revenue and cost relative to what you or Embarq might have been at in your heritage operations.

So do you have a sense of what the cost number is today, as we try to think through the different moving parts from the proposed framework?

No.

I'll tell you, that's something we'll try to get and maybe try to have as the new access and broadband plan moves through the FCC, we can try to give you more color on maybe what our access costs relative to our access revenue and what any changes that are proposed might result in.

That would be really helpful.

Thanks for taking my questions today.

Thank you.

Our next question comes from Michael McCormack.

Hi, guys, thanks.

Stewart, can you just give us a little more color -- I'm just looking at the business markets group versus wholesale -- it clearly looks like you've had some movement of formally Qwest business markets into wholesale, I think that's what I'm seeing here?

But some clarity on that would be great.

And then in data integration, the pro forma 2010 number looks a lot like data integration of Qwest historical, which have been tracking from 145 to 170 at Q4.

And now obviously a number that's much lower than that, so just try to get a sense?

I know you mentioned in the release there's some pressure there, but I'm trying to a sense for exactly what that is?

And lastly, on use of cash, obviously your stocks are down fairly significant right now, just seems like with an after-tax cost of equity, with this dividend yield at 8.3% that doing something sooner rather than later on a stock repurchase might make some more sense?

Thanks.

So, Mike, there's really no switch between -- or no reallocation between BMG and wholesale markets, in terms of revenue.

We're basically allocating customers to BMG Group and to the RMG Group and there was some -- RMG picked up some of the BMG customers and some of the smaller customers, some of the state government customers using the local model, the RMG Group might be closer to.

BMG picked up some of the larger enterprise customers that RMG had, legacy CenturyLink RMG.

But we're basically doing that division similar to the way Qwest had done in the past on a customer basis.

With respect to wholesale though, there's no real change there and no movement of customers from any segment to wholesale or from wholesale to other segments.

Sort of looking back at the Qwest second quarter reported results in the business markets group as was over $1 billion run rate, you've got $961 million, I would've thought that adding Embarq and to a lesser extent legacy Century would've had a more positive impact?

So again, there's very few customers that we've moved over to BMG from RMG.

I can go back, Mike, and try to get that for you to try to basically be able to talk you through that.

We can take that offline.

It's fine.

If you look at 3 months, in BMG, basically we only had $67 million of revenue, if you look at second quarter a year ago of legacy CenturyLink.

So that was basically what was move from legacy CenturyLink over to the BMG segment.

Okay.

Yes, Mike, some of that could be elimination of inter-company revenue too.

As well as elimination of some of the deferred revenue.

Some of that was allocated to wholesale as well.

We can get the details and get that to you so you could reconcile that.

Okay.

On data integration, turning around?

In terms of data integration, and the reason we're missing that, again, it's really most of it's on the BMG segment, and really, most of it as far as we can tell and Chris can tell, is really due to government spending slowing down on CPE, which is what the data integration services primarily are.

As well as just the smaller average deals that they've obtained, that they've sold this year.

Again, the indication is that they've sold about the same number as they have in the past, but the average size of each transaction seems to be smaller than they experienced last year.

Also if you look at our guidance, BMG had a big fourth quarter last year in terms of data integration revenue.

And again, we've scaled our guidance back because we really don't think we'll get to the same fourth quarter, again one-time revenue associated with the data integration that Qwest had in the fourth quarter last year in the BMG Group.

And is it related at all to a change in the government's view on how quickly or whatever they're going to do on the network's contract?

I don't think it has anything to do with that.

I think, the indications are it's just basically slower movement from the government, and we're attributing some of it to basically just the debt ceiling issue and basically the government slowing spending down to wait to see what transpired there.

Okay.

And on my use of cash?

Yes.

I'll just tell you Mike, obviously, we think our stocks -- I personally believe it's an amazing buy right now, we'd likely buying it back.

We are committed to buying back -- or reducing our debt of $1.5 billion to $2 billion over the next 2 years, and we'll just have to look at stock buybacks.

We don't really plan to do anything before early next year anyway.

We take a look at through the rest of this year, we'll be looking at it again, our buyback program use of our free cash flow, but it is certainly a consideration for us, especially the stock price, where it is now.

Okay.

Thanks.

Thank you.

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

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

Glen Post for any closing remarks.

Thank you.

In closing, we believe CenturyLink had a solid financial results for the quarter, improving top-line revenue trends, strong cash flows.

We are also pleased to have closed the Savvis acquisition.

We're looking forward to making solid progress integration integrating Qwest and Savvis in the months ahead.

The last few months have been truly transformational for CenturyLink and we believe we are well-positioned to provide customers the innovative products and service they need.

I'm confident we'll continue to see solid growth in the months ahead, and create long-term shareholder value.

We appreciate your participation on our call today and we look forward to speaking with you again in the weeks and months ahead.

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

This concludes our program for today.

You may all disconnect and have a wonderful day.