Lumen Technologies Inc (LUMN) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to CenturyLink second quarter 2013 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'd now like to turn the conference over to Mr. Tony Davis, Vice President of Investor Relations.

Mr. Davis, you may begin.

Thank you.

Good afternoon everyone and welcome to our call today to discuss CenturyLink's second quarter 2013 results released earlier this afternoon.

The slide presentation we will be reviewing during the prepared remarks portion of today's call is available in the Investor Relations section of our corporate website at www.ir.centurylink.com.

At the conclusion of our prepared remarks today, we will open the call for questions and answer.

On Slide 2 you'll find our Safe Harbor language.

We will be making certain forward-looking statements today, particularly as they pertain to guidance for third quarter and full year 2013 and other outlooks in our business.

We ask that you review our disclosure 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 afternoon 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.

Turning to Slide 3, your host for today's call is Glen Post, Chief Executive Officer and President of CenturyLink.

Joining Glen today will be Stewart Ewing, CenturyLink's Chief Financial Officer, and also available during the question and answer period of today's call will be Karen Puckett, CenturyLink's Chief Operating Officer; Bill Cheek, President of our Wholesale Operations; and Jeff VonDeylen, President of Savvis.

Our call today will be available for telephone replay through August 14, 2013 and the Webcast replay through August 28, 2013.

Anyone listening to a taped or Webcast replay or reading a written transcript of this call should note all information presented is current only as of August 7, 2013, and should be considered valid only as of this date regardless of the date heard or viewed.

As we move to Slide 4, I'll now turn the call over to your host today, Glen Post.

Thank you, Tony.

Good afternoon, everyone and thank you for joining us today to discuss CenturyLink's second quarter 2013 results.

We are very pleased with the financial results for the second quarter and the first half of this year and we continue to make good progress on a number of fronts.

Operating revenues for the second quarter in line with our expectations, while operating cash flow and adjusted earnings per share were near the high end of our previous guidance.

We believe our investments in our key strategic growth initiatives continue to strengthen our overall product portfolio, further positioning CenturyLink as a leading integrated provider of global network, colocation managed hosting and cloud solutions.

Demand from business customers for high bandwidth network and data hosting services continues to drive solid sales opportunities for integrated solutions.

If you'll turn to Slide 5, I'd like to begin with some highlights in the second quarter.

We generated solid financial results with annual strategic revenue growth of 4.1%, a strength in revenue from high speed internet, high bandwidth data products, data hosting and Prism TV were the primary drivers of this growth.

Additionally, we have maintained our focus on expenses as we reduced cash expenses by $45 million, or 1.7% from the year ago period, driven primarily by lower personnel and data integration costs.

From a business market perspective, we experienced strong new sales to business customers across the Company for network and hosting services in the second quarter.

Also during the quarter we made good progress in the share repurchase program we announced in February.

Through August 6, 2013 we repurchased nearly 29 million shares, or 4.6% of our outstanding common stock, for a total of approximately $1 billion.

We have repurchased shares aggressively over the past few months and we expect to opportunistically buy back additional shares going forward.

We continue to expect to complete the $2 billion repurchase by February of 2015.

We still anticipate improvement in our strategic revenue growth during the second half of this year; however, we do expect this level of improvement to be slightly lower than the more aggressive growth we originally anticipated.

Finally, I'm pleased that we have reached a tentative agreement in contract negotiations with the Communications Workers of America and covering many of our western states.

Our focus during these negotiations has been to align the cost structure and work rules under this agreement with the rest of our organization and the competitive dynamics in the markets where we operate.

If you turn to Slide 6, I'll provide an update on our key strategic initiatives.

Starting with broadband expansion and enhancement, we continue to make significant investments in this area that we believe will better serve our business and consumer customers.

We ended the quarter with approximately 5.91 million broadband subscribers.

We did experience the first ever decline in broadband net adds in the second quarter due to typically -- due to typical seasonality and lower than our normal level of indirect sales.

While this quarter was challenging, we do expect broadband subscriber net adds to be positive for the remainder of this year.

We believe our fiber assets position us well in the business market.

In the first half of 2013 we've put over 1,000 of our fiber fed multi-tenant buildings into our advanced MTU program, which offers customers broadband capabilities of up to 500 megabits of symmetrical service and enhances cloud connectivity for these customers.

In addition, we plan to leverage our existing fiber to opportunistically expand GPON capabilities into nearby high density business districts offering broadband speeds of up to 1 gig.

Both the MTU and GPON programs offer upstream speeds in business service level agreements beyond what is normally available with cable, and then makes these capabilities particularly compelling in the business market where upstream capabilities are critical to enablement of cloud services.

In business areas where we do not offer advanced MTU or GPON programs, we've extensively deployed ethernet.

We currently cover over 2 million business locations with ethernet capability with about half this footprint capable of 20 megabits and higher symmetrical speeds today.

In the months ahead, we expect to continue making investments in our network to enhance speed capabilities required to deliver competitive broadband products and services across our markets.

Turning now to Slide 7, our Prism TV service continues to perform well and represents a very compelling entertainment alternative to cable TV service in the markets where we offer the service.

We had over 12,000 Prism TV subscribers during the second quarter, ending the quarter with a total of 132,000 subscribers in service.

These customers continue to have a high rate of broadband attachment, it was actually 97% in the second quarter of this year and over 50% of these customers are new to CenturyLink.

We now have a penetration rate of nearly 9% across the markets in which the service is available, and that includes the newest markets of Phoenix, Colorado Springs and Omaha.

Prism TV triple play bundled customers are significantly less likely to churn than single play voice customers.

In the second quarter the churn rate for Prism TV triple play customers was over 500 basis points lower than the single play voice customers.

We're pleased with the early Prism subscriber growth in Phoenix, our first legacy Qwest market which provides this video service.

And in the second quarter we also commercially launched the service in Colorado Springs and soft launched in Omaha with our fiber to the prem service.

In addition, we continued to enhance our IP TV features by introducing new functionality and applications including, especially our TV everywhere capabilities, video on demand library and a recent successful trial of wireless set top boxes.

Now going to Slide 8, a third strategic initiative is investing in fiber builds to as many towers in our service areas as economically feasible.

During the second quarter we completed more than 1,150 fiber to the to tower builds for a total of over 16,700 across our footprint.

We currently expect to complete a total of 4,000 to 5,000 builds in 2013.

As we've discussed with you before, we are experiencing some revenue compression as our wireless wholesale customers transition from copper based DS1 facilities to fiber based ethernet services; however, we anticipate that wireless data bandwidth growth will result in expansion of ethernet consumption, reversing the current revenue compression during 2014.

Now moving on to Slide 9, managed hosting and cloud services, we continue to believe we're well positioned to capitalize on long term growth opportunities in this space where we've developed and are expanding our strong product offering for businesses of all sizes.

We continue to build upon solid momentum on the first -- past two quarters with solid new sales again this quarter.

Cross sell, our team selling opportunities for hosting products across our hosting and network sales teams continues to be strong with sales of hosting services business customers steadily growing.

We also continue investing to increase our data center capacity, as well as expand our product portfolio to meet customer needs and expand our market opportunity.

In the second quarter we opened a new data center in London, adding approximately 25,000 square feet of sellable floor space and for full year 2013, we continue to expect to add a total of approximately 87,000 sellable square feet, of which over 57,000 has been added in the first half of the year.

Our recent acquisition of AppFog, a rapidly growing platform-as-a-service provider used by more than 100,000 developers who deploy to over 150,000 applications, represents an excellent addition to our Savvis cloud service suite.

We are offering multiple programming languages and interoperability between public and private cloud environments, and AppFog delivers a reliable, scalable and fast platform for developing out in the cloud.

Combining AppFog's market leading platform-as-a-service capabilities with our industry leading infrastructure-as-a-service, Savvis cloud services and our global network, CenturyLink will deploy developer -- enable developers to securely and reliably operate and connect the applications they build and deploy.

We look forward to making the full suite of AppFog services available to both our existing and prospective customers in the weeks ahead.

Finally in June, Savvis was recognized as a leader in the Gartner Magic Quadrant for European managed hosting, another confirmation of CenturyLink's global leadership position in managed hosting and overall, I'm pleased with the financial results for the quarter.

We continue to invest to drive growth and are experiencing good traction in those key areas and with that, I'll turn the call over to Stewart for an in depth look at our financial results.

Thank you, Glen.

I'll spend the next few minutes reviewing the financial highlights from the second quarter and then conclude my remarks with an overview of the third quarter and full year 2013 guidance we included in our earnings release issued earlier this afternoon.

Starting on Slide 11.

Beginning this quarter, we are providing guidance on core revenues.

Core revenues reflect the two largest contributors to operating revenues, our strategic revenues and legacy revenues.

Strategic and legacy revenues account for approximately 91% of total revenues and are primarily recurring in nature.

Core revenues exclude revenues from data integration which includes primarily customer premise equipment sales and related maintenance, and other revenues which includes primarily universal service receipts.

As you can see in the chart on Slide 11, the green line represents the annual percent change for core revenues, while the orange line represents the annual percent change for total revenues.

The core revenue trend has improved from a 3.2% decline in pro forma 2011 to 2.3% decline in 2012 and we expect further improvement in 2013 with a decline of 0.9% to 1.5%.

We believe this trend is a more accurate reflection of the underlying business as it takes out the noise of changing USF contribution rates and the lower margin CPE business.

Turning to Slide 12.

With that let's move to our results for the second quarter.

I'll be reviewing the results excluding special items as outlined in the earnings release and associated financial schedules.

As you can see, we generated solid operating revenues and cash flows in the quarter.

Operating revenues were $4.53 billion on a consolidated basis and this represents a 1.9% decline from second quarter 2012 operating revenues.

Our core revenues were $4.11 billion for second quarter, a decline of 1.6% from the year ago period.

Strategic revenue in the quarter increased to 48% of total revenue from 45% in the second quarter a year ago, due to growth in strategic products such as high speed internet, high bandwidth data services, Prism TV and managed hosting services.

Adjusted diluted earnings per share for the second quarter was $0.69.

As we've discussed on prior calls, adjusted diluted EPS excludes special items and certain non-cash purchase accounting adjustments, as outlined in our press release and associated supplemental financial schedules.

Total cash operating expenses declined from second quarter 2012 to second quarter 2013.

This decline was primarily the result of lower personnel related and data integration costs.

We generated strong operating cash flow of approximately $1.86 billion for the second quarter and achieved an operating cash flow margin of 41.1%.

Additionally, we generated $703 million of free cash flow during the quarter which is defined as operating cash flow less cash paid for taxes, interest, and capital expenditures and additional adjustments to other income.

Our strong cash flows continue to provide us the financial strength and flexibility to meet our business objectives and drive long term shareholder value.

Now turning to Slide 13.

The decline in second quarter 2013 operating revenues compared to second quarter a year ago was primarily a result of growth in strategic revenues that was more than offset by lower legacy revenues due to access line losses and lower minutes of use.

The growth in our strategic revenues was primarily driven by strength in high speed internet, high bandwidth business data services, and our data hosting services.

Now turning to Slide 14, which is our consumer segment, I'll discuss each of the operating segments beginning with consumer.

Consumer generated $1.4 billion in operating revenues which represents a decrease of 3% over second quarter a year ago.

Strategic revenues in this segment grew 6.4% year-over-year to $628 million.

Legacy revenues declined for the segment, declined 8.7% from second quarter 2012 due primarily to a continuing decline in access lines, long distance revenues, partially mitigated by implementation of the access recovery charge in July of 2012.

Expenses in this segment declined $17 million, or 3% during second quarter compared to the same period a year ago, driven mainly by lower bad debt expense, network and facility costs, which were partially offset by higher costs associated with our Prism TV product.

Moving to Slide 15.

Our business segment generated $1.53 billion in operating revenues during the second quarter which were slightly below revenues from the same year ago period.

Second quarter strategic revenues for the segment increased by 4.6% to $617 million from second quarter 2012, driven primarily by strength in high bandwidth services such as MPLS, ethernet and wavelength.

Excluding low bandwidth services, strategic revenue grew nearly 10% from a year ago.

Legacy services revenues for the segment declined 4.9% from second quarter 2012, due primarily to a continuing decline in access line and long distance revenues, partially mitigated by the implementation of the access recovery charge in mid year 2012.

The total segment expenses declined $6 million driven by lower data integration and network costs, partially offset by higher facility costs.

Now turning to Slide 16, our wholesale segment generated $910 million in operating revenues, a decline of 3.8% from second quarter 2012.

Strategic revenues for wholesale were $572 million, nearly flat from second quarter 2012 as declining low speed transport services revenue offset growth in ethernet services and data bandwidth capacity expansion by the wireless carriers.

Legacy revenues declined by 9% to $338 million, reflecting the continued decline in access and long distance minutes of use and the implementation of lower access rates under the CAF Order rate step down.

Our operating expenses for the quarter in this segment were $301 million, 3.8% below the same period a year ago, driven primarily by lower facility costs.

Now moving to Slide 17 and our data hosting segment, which includes all colocation, managed hosting, cloud services, and hosting related network services revenue.

This segment generated $347 million in operating revenues, representing an increase of 7.4% from second quarter 2012 revenues of $323 million.

This growth came primarily from year-over-year increases of 2.1% in colocation revenues and 20.7% in managed hosting and cloud services revenues.

Second quarter 2013 revenues include approximately $15 million of revenue contribution from the Ciber IT Outsourcing assets acquired in October 2012.

Excluding this revenue, managed hosting revenue grew 7.4% year-over-year.

Data hosting revenues also grew 4% sequentially from first quarter this year driven by strength in the managed hosting products.

Data hosting operating expenses were $273 million in second quarter, compared to $239 million in second quarter 2012.

This increase of 14% is driven by added data center expansion, operations and sales and marketing headcount to support revenue growth, including headcount for Savvis Direct and enabling sales channels along with expenses related to the acquisition of the Ciber ITO assets not present in the prior year period.

Turning to Slide 18, we provide our third quarter and full year 2013 guidance.

For the third quarter 2013, we expect total operating revenues of $4.5 billion to $4.55 billion.

And core revenues of $4.09 billion to $4.14 billion and operating cash flow between $1.79 billion and $1.83 billion.

Adjusted diluted EPS is expected to be in a range from $0.59 to $0.64.

Our anticipated sequential decline in third quarter operating cash flow and adjusted diluted EPS compared to second quarter results is primarily due to higher seasonal expenses we typically incur in the third quarter each year, associated with our outside plants maintenance and utility costs, and increased costs related to our continued investment in key initiatives.

For the full year 2013, the Company has updated it's guidance to reflect year-to-date results as well as updated expectations for the remainder of the year.

Full year operating revenues guidance has been lowered slightly to $18.05 billion to $18.2 billion.

Although our first half results were in line with our previous expectations and our second half forecast reflects improved growth rates for total revenues, we are anticipating that these levels of growth will be slightly lower than the more aggressive amounts we originally anticipated.

Some of the primary drivers of this reduced level of growth in the second half of the year are slower acceleration in data hosting revenue growth rates, a faster rate of decline in our low bandwidth services, and lower than originally anticipated federal universal service contribution rates which really is a flow through item.

This level of revenue growth in the second half of 2013, although still reflecting a positive trend in growth rates, is lower than our original projections and we believe will likely result in a slight decline in 2014 total revenues compared to 2013.

Additionally, we have tightened the ranges for operating cash flow and adjusted diluted EPS.

Even with the revision to our revenue guidance, these new projections for operating cash flow and adjusted diluted EPS are better than our original 2013 projections due to our control of cash expenses during the year and the impact of our share repurchases.

We also expect capital expenditures to range from $2.9 billion to $3 billion due to increased investment in broadband capacity, higher than expected success-based business sales, and an increase in new subdivision greenfield fiber builds.

This increased capital investment also influenced the revision in our free cash flow guidance for the year.

This concludes our prepared remarks for the day.

So at this time, I'll ask the Operator to provide instructions for the Q&A portion of the call.

Thank you.

(Operator Instructions)

David Barden, Banc of America.

Hi, guys.

Thanks for taking the questions.

So Stewart, 90 days ago, you guys came out and raised the expectations for the business and now we're taking them back down, actually pretty much to where they started on EBITDA but a little bit lower on revenues, and we had this line in the sand for trying to get to flattish revenues for a long time in 2014.

So something over the last 90 days seems to have really dramatically changed to kind of back away from these longstanding targets and obviously everyone is going to run around with their hair on fire until we find out what it is.

Can you elaborate on what's going on?

That would be great.

So David, I think the primary things affecting the latter half of the year.

Number one, the [Fuski] rate is down so that contributes somewhat to the decline in revenue.

Can you quantify that Stewart?

How much of that change is related to that?

It's probably about $20 million or so.

The other, let me get it, David, just a second.

I think it's $25 million to $30 million, David, and then the other things affecting the last half of the year really is the Savvis Direct product that we rolled out.

The sales channel through the internet has not materialized as quickly as we had hoped.

We've done a good job we think with Savvis in terms of cross-selling the Savvis products into and gaining momentum there in the second quarter, and expect to gain some more momentum in the third quarter.

But Savvis Direct probably about $20 million below what we had hoped in the second half of the year to be.

And then our lower speed products, lower bandwidth products probably about $30 million or so there, primarily again related to a little bit faster conversion of our fiber to the tower where we're disconnecting the copper circuits and seeing some of the compression a little bit quicker than we had anticipated.

So those are really the three primary items that are affecting the latter half of the year.

And Stewart, as a follow-up to that, as we lower the EBITDA expectation and raise the CapEx expectation, it's kind of the scenario that you don't want to see for a dividend paying company if it kind of continues along these trends.

So as you look into the back half of the year, what are the upside surprises, what are the -- as you look into your next 90 days, what are the downside surprises that could potentially emerge here?

David, frankly, I think we've got everything built in.

Again, we lowered EBITDA but we lowered it basically back to where we started the first of the year and in effect, we've just got cost in the latter half of the year associated with some of the growth initiatives and they are in fact starting to drive revenue.

We're starting to see some of that benefit and we just don't want to back down from the standpoint of reducing the expenses associated with that.

On the CapEx side, most of the incremental CapEx where we raise, effectively raise the guidance maybe $50 million or so there by closing the gap from $2.8 billion to $3 billion to $2.9 billion to $3 billion is more associated with success that we're having on the customer side in the business segment, as well as new home developments or new subdivision developments.

Which hopefully, again, over long term will translate into revenue opportunities for customers in those areas, because we're putting fiber in most of those subdivisions to enable more high bandwidth services to those areas.

The third area was basically just capacity growth within the network just for normal growth and due to really our customers using video streaming, I think more as they are across the rest of the industry as well.

So not a significant increase there and two out of three of those really should result in increased revenue over time, and the third increase in bandwidth should help us with our being able to add new high speed internet customers and maintain the customers that we have.

Thanks, Stewart.

And I promise this is my last one, is just given that you're chewing through the buyback so quickly, are you willing to keep your foot on the gas on that buyback or given that you're kind of moving into the second $1 billion already are you going to slow it down?

David, I think that depends on where the stock price goes.

We've essentially been using all of our free cash flow to repurchase shares.

In effect that's where the incremental free cash flow is going in the first six months of the year, and I think it just really depends -- we'll be opportunistic in the latter half of the year and next year and we'll -- again, just depends on the stock price.

Got it, thanks, guys.

Brett Feldman, Deutsche Bank.

Thanks for taking the question.

I was hoping we could dig into the broadband sub losses a little bit and just a couple questions there.

So first of all on the seasonality, could you just remind us, is the seasonal slowdown typically a function of gross adds or churn and to what extent were those sort of similar, different than what you've usually seen?

I'm also interested in the impact of the indirect channel, maybe just explain a little more what happened there.

And then the last question is of the customers that you're losing, are you seeing any consistency, for example, they tend to be lower speed customers as opposed to higher speed customers?

This is Karen Puckett.

In terms of seasonality -- seasonality as we've grown with the Qwest acquisition, we have more snowbird type states and so we did have a lot of success with snowbirds in terms of getting them in.

Typically that's people going back to the Northeast or to the Midwest as well as college students.

So that's typical in terms -- and we pretty much told in last call that upcoming with seasonality.

On the indirect side, we have a particular partner that basically had some under performance relative to trend rates and that caught us.

In terms of the churn to lower, what I would say, is the footprint, if we look at our fiber to the node footprint, we certainly have better churn and close rates than we do in our ATM footprint.

So that is a fact but we now have 7.4 million households on our fiber to the node product.

So you think about the back half of the year, you obviously get a seasonal boost in the third quarter.

Is that the principal reason why you're optimistic you'll return to growth or are there any other things going on that should help that through the balance of the year?

We're pretty good on execution in high speed.

We have a good track record so I'm confident that we will be back positive.

Obviously the back half of the year is -- we don't have the seasonal situation and we have always have our plans in place and pretty much every day where the levers are.

So we're confident on the back half of the year.

Great.

Thanks for taking the question.

Phil Cusick, JPMorgan.

Hi, guys.

Its Phil Cusick.

Two things on the revenue side, first on Prism, can you give us an update there?

You talked about higher investment in the second half.

Is that a little bit more Prism efforts?

And then second on the revenue in '14, should we still -- is it still fair to expect that at some point in '14 revenue grows sequentially quarter to quarter or should we still be watching it track down through '14?

Thanks.

Yes, so your last question in terms of revenue, we aren't ready to put a stake in the ground in terms of quarter to quarter of 2014 and we think we'll be able to give more guidance there, certainly if not at the end of the third quarter at the end of the fourth quarter as we normally do.

But again, we're just tweaking our revenue guidance a little bit.

It's not significant in terms of the real aggregate dollar and change.

In terms of higher Prism TV, there's really not any additional CapEx on Prism TV in the second half for the most part.

There may be a little bit of increased expenses because we continue to rollout more areas in the Phoenix market and also the Omaha markets and Colorado Springs, so there may be slightly increased expenses associated with Prism in the back half of the year compared with the first half.

Okay and then as we -- despite a little bit of a revenue down tick, we are getting closer to revenue being flat at this point.

Is there a significant change in your mindset where you reach that flat revenue, does that open things up strategically for you a little bit more, whether that's acquiring other companies or being a little more aggressive in terms of investing in the business?

Phil, I'm not sure it opens things up necessarily.

We're focused right now on our key growth areas, growth objectives, growth strategies as we have been.

We believe that there is significant growth there.

We don't think we have to acquire in order to drive growth.

And with our stock price being suppressed, we believe under valued right now, it obviously makes a large transaction difficult today.

That being said, we will continue to consider inorganic opportunities but we will maintain our very disciplined approach in making those decisions.

So we'll see what the opportunities are and obviously, I think as you turn the revenue dynamics around and see revenue flat and eventual growth and certainly the stock price should follow that, but that is obviously a major factor here in large acquisition decisions.

Thanks, Glen.

Simon Flannery, Morgan Stanley.

Thanks very much.

Wonder if we could just talk a little bit more about Savvis Direct?

Could you just do a little bit of diagnostic on what was the reasons behind the shortfall, was it sort of a timing of the product?

Was it sort of pricing or what are the kind of the feedback you're getting in terms of why that didn't ramp, and is that something that it's just delayed a couple of quarters we should see that benefit in '14?

And then on the union deal, I understand it's not ratified but is there anything in your 2013 guidance for any benefits from that or is that all likely to flow through in 2014?

Thanks.

Hi, Simon, it's Jeff.

I'll take the one on Savvis Direct and then pass it to Glen or Stewart on the union question.

On Savvis Direct, clearly that product is set to -- we really rolled that out to deliver an online and web channel platform, which we didn't have in the legacy Savvis cloud platform.

It was more of an enterprise play and so I think that market is difficult in terms of adoption rate and we are behind some of the what was pretty aggressive ramp up in growth in the second half of the year.

So I think it's the right platform, the right capabilities.

I just think the uptake in penetration is slower than our original plans.

We also think that AppFog, frankly, that acquisition is really strategic to our cloud platform, especially as we think about the enterprise which is where we, where our hosting services play best.

So we're really looking at AppFog with developers together with our entire suite of Savvis cloud products to really give us an opportunity to talk to enterprises and the developers in enterprises where we weren't able to talk to before to accelerate more of that cloud play.

So we're short on the online and web, but frankly we think that the play with a developer and strengthening our enterprise portfolio is the right move for us.

Good.

Regarding the union agreement, we have not affected any benefit or cost in our forecast for the rest of the year, Simon.

Okay, thank you.

Batya Levi, UBS.

Great, thanks.

Just one more follow-up on the guidance question.

The low end of the new revenue guidance is outside of the prior range, so does this change mean that you expect to come in at the low end of the guidance in terms of revenues or how could that sort of change throughout the second half?

And second question on the cost side, you mentioned that you still have more cost cutting initiatives.

Can you provide more color on where they could come from and how do you think about margins going forward?

Thank you.

So Batya, the low end of the guidance being outside of the prior range does not mean that we're basically targeting the low end of the range.

One of the reasons we lowered the top end is because of the Fuski rate which again, is probably $30 million or so of shortfall in the second half of the year.

So it shouldn't be an indication that we expect to come in at the low end of the range.

In terms of other cost saving opportunities, we've been saying the last few quarters that we think our margins will continue to come down slightly.

We've been able to, through managing the cost, been able to keep them fairly flat but I would think that we would still say that just with the margin compression that you see with losing the higher margin revenue and substituting for that the lower margin revenue from some of the services that we're growing, basically you would see some margin compression over time.

Okay, thanks.

Tim Horan, Oppenheimer.

Thanks, guys.

Obviously you have a balancing act between stock buybacks and CapEx and I know you are spending at the much higher range than your peers, but do you think if you spent a bit more in CapEx to get more of the fiber out the node a little faster that could help the growth rate and it seems like it would be pretty high return on invested capital?

Just curious on your thought process of balancing that out, thanks.

Yes, Tim this is Glen.

We debate that on a continual basis.

It's a balancing act of how much we spend on CapEx but yes, there's no question that you can drop more growth by building more fiber, fiber deeper, the question is which returns are overall and what's the best use of capital.

We have the capital allocation is one of the most difficult seasons I think our entire industry faces, and one of the potential items we look at is fiber to the node or fiber deeper in the network, and then fiber to the prem, fiber to businesses and MTUs.

Those are all part of the decision making process and what we look at is trying to invest in the areas that can drive the most growth and also have the better solid margins and that's what we're looking at.

So that's a continual decision process for us really.

Thanks.

Thank you.

(Operator Instructions)

Alex Scott, Raymond James.

Great, thank you, it's actually Frank, made it to the call.

A quick question, looking at the Savvis business, it looks like the co-location growth about 2% year-over-year, can you talk to us about what's going on there?

This seems like maybe you aren't getting as much traction as maybe you had expected.

Is there anything structurally there going on or anything from a market perspective, a demand perspective that you're seeing, what's sort of driving that growth rate right there?

Yes, hi, Frank.

Jeff again.

On co-location, I think one of the things we continue to manage through is some large -- we talked about this I think the last call -- some large customer churn events.

We've got customers like eBay, Yahoo who are building their own data centers.

They are existing customers.

They are ultimately going to exit our data center, so it's about managing them out and then our fill rate back in.

So we still feel good about that business and that market but I think we have a tremendous opportunity to add more, what I'll call retail customers into that, especially Glen talked about the teaming success of the CenturyLink customers.

So you'll see us continue to expand our footprint in co-location.

It will likely be in markets that are legacy network sites like Minnesota, like Arizona, like North Carolina, so I think we feel good about the market and I think our customer mix is changing.

We think that's a higher value and a better margin customer, but we've got to manage through some larger end customers who have built their own facilities.

I might just add to that, Frank, if you look at our cloud services growth is close to 25% and our managed services is the high teens.

So it's really some of the local network side that was slower and the co-location side that was slower growth for us, and we have not invested as heavily from a CapEx standpoint in the data centers as some other companies have.

So we don't expect to have that 15% growth from co-location side because we don't believe the returns are as good there long term as some of the other opportunities we have.

Okay, great.

And then looking at the Connect America Fund money you've been offered, any thoughts on how much of that looks attractive to you, how much do you think you might be taking or when you might be able to give us an update on that?

Would you repeat that question?

Well looking at some of the new Connect America Fund, the money that's been offered, the second release of Cap 1, any thoughts on how much of what is sort of been allocated do you think that you all will choose or any update on when you might be able to give us an update on when you might determine how much of that is available to you, you'd be willing to take?

Yes.

Frank, we expect to have significant amount available in Cap 2 probably in excess of $400 million.

We aren't sure yet.

It's just kind of an estimate there.

It depends on what the terms are.

We're hearing pretty positive feedback from the FCC that they really want to encourage investment in low density rural areas.

So we're hopeful that could be a catalyst for us and as far as expanding our investment in areas that are under served or unserved really today and we also, on the latest capital, we were allocated $90 million.

We aren't sure how much of that we will spend but we're looking at that as we speak, and we'll spend quite a bit of that in the next year or so.

That's great, thanks.

We have to update the FCC in late August.

Okay, thank you very much.

Michael Rollins, Citi.

Hi.

Thanks for taking the question.

I was wondering if you could talk a little bit more longer term about ideally how big do you want to see Prism within your footprint in terms of homes passed and is there a way of thinking about if you want to get to that point what the investment implications of that would be?

Yes, Mike.

We try to look at that and it's really success-based from our standpoint.

We've said before we want to see how Phoenix and Colorado Springs do in these larger markets and we have Omaha with the gig service now, and we'll make decisions after that.

We think around 30% or more of our access lines are suitable for our Prism service so we will -- that's what's on our radar right now.

We continue to look at compression technologies and other ways to make that footprint even larger but as we continue to see success in Phoenix and Colorado Springs, and we'll have more reason to go after other markets more quickly.

Thanks.

Thank you.

I'm showing no further questions at this time.

I'd like to hand the conference back over to Mr. Glen Post for any closing remarks.

Thank you.

Please turn to Slide 24 as we close today's call.

Overall, we are pleased with our results for the second quarter.

We believe our continued investment in key strategic opportunities continued to help us drive revenue growth and strong financial results and will over time.

Our strategic product and services development continues to strengthen CenturyLink's competitive position and our guidance reflects our expectation that our revenues in these strategic services will continue to grow.

The expansion of our Prism TV service and the recent launch of managed hosting and cloud services for small and mid sized businesses will further strengthen the product portfolio and should provide us additional revenue growth opportunities in 2013 and beyond.

And lastly, we are pleased with the progress we made in the share repurchase program since inception in mid February and we will continue that program in the months ahead.

Thank you for joining our call today and we look forward to speaking with you in the weeks ahead.

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

This concludes our program for today.

You may all disconnect and have a wonderful day.