CenturyTel, Inc. (NYSE:CTL)
Q3 2009 Earnings Call
November 05, 2009 11:30 am ET
Tony Davis - VP of IR
Glen Post - CEO and President
Stewart Ewing - CFO
Karen Puckett - COO
Good day ladies and gentlemen and welcome to CenturyLink’s third quarter 2009 Earnings 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) This conference is being recorded.
I would now turn the conference over to Mr. Tony Davis, Vice President of Investor Relations. You may begin.
Good morning, everyone and welcome to our call today to discuss CenturyLink’s third quarter 2009 earnings results released earlier this morning. As we mentioned during our second quarter earnings call, effective with the July 1, 2009 closing of the EMBARQ transactions, CenturyTel began operating under the trade name CenturyLink. Unless otherwise noted in the press release or in our remarks this morning, the third quarter 2009 results discussed in the press release and during our call today include the effect of the EMBARQ acquisition.
Also during today's call we will refer to certain non-GAAP financial measures. We have reconciled these measures to GAAP figures in our earnings release which is available on our website at www.centurylink.com.
Your host for today's call is Glen Post, Chief Executive Officer and President of CenturyLink. Joining Glen on the call today is Stewart Ewing, CenturyLink’s Chief Financial Officer. Also available during the call today is Karen Puckett, CenturyLink's Chief Operating Officer.
We will be making certain forward-looking statements today particularly as they pertain to guidance for fourth quarter and full year 2009, selected information regarding 2010, and other out looks in our business.
We ask that you review our safe harbor language found in our press release, and in our SEC filings, which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements.
Our call today will be accessible for telephone replay through November 11, 2009 and accessible for webcast replay through November 25, 2009. For anyone listening to a taped or webcast replay of this call or for anyone viewing a written transcript of today's call, please note that all information presented is current only as of November 5, 2009, and should be considered valid only as of this date regardless of the date listened to or reviewed.
At this time I'll turn the call over to your host today, Glen Post. Glen?
Thank you all for joining us today as we discuss CenturyLink's third quarter 2009 operating results and our guidance for fourth quarter and full year 2009. Diluted earnings per share excluding non-recurring items was $0.90 for the quarter, $0.08 ahead of the $0.82 upper end of our previous guidance and $0.09 higher than first call, (inaudible) of $0.81 per share. About $0.07 of this over achievement was due to results of the preliminary assignment of fair-value as related to the EMBARQ acquisition.
Operating revenues for the quarter were $1.874 billion or slightly above the midpoint of our previous revenue guidance to $1.85 billion to $1.89 billion. We experienced strong demand for broadband services during the quarter as we added more than 43,500 high speed Internet customers. This was a significant improvement over pro forma second quarter ads of approximately 29,000, driven primarily by an aggressive broadband strategy and our launch of pure broadband across the EMBARQ markets.
We ended the quarter with more than 2.189 billion high speed internet customers, over 39%, penetration of our residential customer base and approximately 31.9% penetration of a total addressable access lines.
We experienced access lines [losses] of 169,800 during the quarter which represents a sizable improvement over the second quarter 2009, pro forma line loss of 187,500 and a 16% improvement over the third quarter '08 pro forma line loss of 202,600.
Our annualized residential access line losses for the quarter was 10.3% which is a nice improvement from 11.2% and pro forma second quarter 2009 and 12.2% and pro forma third quarter 2008. Now the economy does continue to impact our business access line performance as we continue to experience fewer business starts as well as downsizing by existing business customers. However we did see some sequential improvement in our level of business access line losses compared to the second quarter of 2009.
Additionally we experienced strong demand for our satellite video product as we added nearly 39,500 Dish customers during the third quarter. We ended the quarter with more than 500,000 Dish satellite video subscribers.
Total video subscribers as a percentage of primary residential lines is approximately 11%. We also continue to develop our IPTV capabilities in Columbia, Missouri and LaCrosse, Wisconsin. We launched IPTV service in Jefferson City, Missouri which is being served from our video head end in Colombia. We continue to see strong positive customer retention impact with our IPTV offering and we believe there's also a strong customer relationship between our IPTV and high speed internet offerings. We [can] plan to continue leverage this relationship in future product and bundle offerings.
Before turning the call to Stewart, I want to make a comments regarding our progress with the EMBARQ integration. We closed the EMBARQ acquisition effective July 1st. The implementation of our new operating model is going very well and we believe it is already making a difference in the legacy EMBARQ markets to an increased local market focus with sales and service decisions and accountability close to the customer.
We have implemented our aggressive broadband strategy in EMBARQ markets in the third quarter and among a number of things, this effort included consumer promotional pricing for high-speed internet and the targeting of non customers with our pure broadband products. It has proven very successful and obviously contributed to our broadband customer growth during the quarter.
From a synergy perspective we continue to anticipate achieving approximately $375 million of cost savings, within the first three years post closing of the transaction. We exceed our estimates and achieved approximately $14 million in operating expense synergies during the third quarter. We anticipate additional incremental synergies of about $12 million during the fourth quarter of this year.
From a systems conversion standpoint, we made great strides. In early October we successfully completed the conversion of the Financial and Human Resource systems, formally used by EMBARQ to our SAP system. Also, in October we completed a successful conversion of our Legacy EMBARQ customers in Ohio to CenturyLink's billing, customer care and provisioning systems with minimal customer impact. This was a very successful process and it will help pave the way for the successful conversion of the remainder EMBARQ customers in the months ahead.
Finally we officially launched our new CenturyLink brand across our operating service territories in late October and are now serving our customers across a 33 states footprint under a single brand, CenturyLink.
So, overall we are off to a great start with the EMBARQ integration. I am very pleased with the accomplishments of our entire CenturyLink team. With that I'll turn the call over to Stewart to provide additional details on our results for the third quarter. Stewart?
Thank you, Glen. During the next few minutes, I will review some highlights of our third quarter 2009 operating results and briefly discuss additional financial matters. I will conclude my comments this morning with a discussion of fourth quarter and full year 2009 guidance provided in our earnings release issued earlier today.
Since we reported fairly significant non-recurring or one-time items during the third quarter, I want to make a few remarks regarding those items before I discuss the third quarter normalized results with you.
First, we incurred $127.5 million in after tax cost related to integration expenses associated with our acquisition of EMBARQ, or about $0.43 per diluted share. Second, those items were more than offset by a $133.2 million after tax extraordinary gain recognized upon the discontinuance of regulatory accounting or about $0.44 per diluted share and a $0.02 per diluted share favorable impact due to the resolution of transaction tax issues.
In the aggregate, these items positively impacted GAAP earnings for the quarter by $0.04 per share. Due to the size of the EMBARQ acquisition in relation to Legacy CenturyTel, I'm not going to discuss percentage increases between third quarter 2009 and third quarter 2008. However, if you will focus on the table in our press release, you will see that we were able to translate the increased revenues from EMBARQ into larger percentage increases in operating cash flow and net income. Additionally, the all stock acquisition of EMBARQ resulted in an 11.1% increase in earnings per share.
Now turning our attention to normalized results for the third quarter 2009 excluding these one-time items compared to normalized third quarter 2008 results; for third quarter 2009 operating revenues increased $1.224 billion to $1.874 billion from $650.1 million in the third quarter of 2008. The EMBARQ acquisition contributed operating revenues of $1.299 billion during the quarter.
Voice revenues for the third quarter 2009 were $829.7 million versus $218.3 million in third quarter a year ago. This $611.4 million increase in voice revenues was primarily driven by voice revenues from the EMBARQ acquisition that more than offset revenue declines associated with anticipated lower access lines.
Network access revenues were $352.8 million versus $205.4 million in third quarter 2008. This increase of $147.4 million was driven by network revenues attributable to the EMBARQ acquisition that more than offset revenue declines associated with lower intrastate minutes of use and lower interstate revenue requirements as well as lower universal service fund receipts.
Data revenues increased $337.9 million from $132.6 million in third quarter 2008 to $470.5 million in third quarter 2009. Primarily driven by data revenue contributed by the EMBARQ acquisition and continued strong high-speed Internet customer growth.
Fiber transport and CLEC revenues increased slightly less than 15% to $43.7 million in third quarter 2009 from $38 million a year ago primarily due to revenues attributable to the EMBARQ properties. Other revenues were $177.7 million compared to $55.8 million in third quarter 2008 primarily reflecting other revenues contributed by the EMBARQ acquisition that more than offset lower equipment revenues this year versus the same period a year ago.
Operating expenses increased $837.7 million from $469.3 million in the third quarter 2008 to $1.307 billion in third quarter 2009. Primarily due to operating expenses associated with the EMBARQ properties which more than offset lower operating cost of $53 million due to the discontinuance of regulatory accounting for certain regulated operating entities.
As we discussed with you in the last couple of quarters, non-cash pension expense is running higher in 2009 than in 2008 due to the performance of the financial markets in 2007 and 2008 which is the case for most if not all companies with defined benefit plans.
For third quarter 2009, we generated an operating cash flow margin of 49.6% compared to an operating cash flow margin of 47.5% in the third quarter 2008. Depreciation and amortization expense increased to $362 million in third quarter 2009 from $128.4 million in third quarter 2008 primarily due to the EMBARQ acquisition. However, this increase in depreciation and amortization was approximately $34 million or about $0.07 per diluted share lower than we previously forecast at the end of the second quarter 2009 due to adjustments to reflect the preliminary assignment of fair value to EMBARQ’s property and intangible assets.
The fair-value assignment to those assets has not been finalized at this time therefore, depreciation and amortization may change significantly from amounts reported during the third quarter or forecast for fourth quarter 2009 upon finalization of the purchase price allocation process. We expect to finalize that process prior to the end of 2009.
Operating income for third quarter 2009 was $567.6 million compared to $180.7 million in the third quarter a year ago. Other income was approximately $9.4 million in the third quarter 2009 or approximately $7.9 million higher than the same quarter a year ago primarily due to higher earnings from our minority interest in a wireless partnership.
Net income attributable to CenturyLink for the quarter was $269 million compared to $82.8 million in third quarter 2008. We also generated solid free cash flow of $345 million during the third quarter. If you exclude the $27 million of integration related capital expenditures, we generated free cash flow of nearly $372 million.
During the third quarter, we recognized approximately $195 million of integration transaction and other acquisition related cost or approximately $60 million more than we had anticipated for the quarter. These costs were higher than the anticipated primarily due to earlier than anticipated recognition of severance and additional benefit cost triggered by change of control provisions. Due to the nature of the EMBARQ severance plans and our accounting practice of recognizing severance during the quarter it is announced only a small portion of the severance cost were actually paid in cash during the quarter.
Now turning to capital structure; overall third quarter results were solid and in line and even better than our initial expectations and from a capital structure standpoint, we are very well positioned. As of September 30, 2009 CenturyLink’s debt-to-equity ratio was 0.88 to 1 and net debt to annualized third quarter 2009 operating cash flow was 2.1 times. So, CenturyLink continues to generate strong cash flows, maintains a solid balance sheet, and is in great shape financially.
Our net debt outstanding at September 30, 2009 was $7.7 billion compared to $3.1 billion at the end of 2008. So, we believe CenturyLink’s strong cash flows and excellent liquidity position us to continue to take advantage of opportunities and meet challenges as they arise.
Finally I'd like to discuss the fourth quarter and full year 2009 guidance provided in our press release this morning. First, cost incurred by CenturyLink in the fourth quarter 2009 related to the EMBARQ integration will be treated as non recurring items. Additionally, I'm sure you are aware that CenturyLink issued $250 million of tenure 6.15% notes and $400 million of 30 year 7.6% unsecured senior notes, September 14th in association with the Waterfall debt tender offers announced that day.
We completed the tender process in early October and we announced that we accepted for payment approximately a total of $746.1 million of outstanding notes that were tendered and accepted for payment. These notes were settled on October 14th; about $546 million of the notes came due originally in 2013; about $182 million came due in 2012 and about $17 million were to be due next year. The primary benefit of our notes offerings and settlement of the tendered and accepted notes is that we were able to significantly lower our 2013 debt maturity tower and extend our overall debt maturity schedule.
We will record a one-time pre-tax charge during the fourth quarter related to the debt tender offers and settlement of $61 million which will also be treated as a non-recurring items. These non-recurring items are excluded from the diluted earnings per share guidance provided in our press release and in my comments regarding fourth quarter and full year 2009 diluted earnings per share guidance.
Finally, as I discussed a few minutes ago we expect to finalize the fair-value assignment to EMBARQ’s property and tangible assets prior to release of year end 2009 earnings.
Depreciation and amortization may change significantly from amounts included in our guidance as a result of the finalization of the fair value assignment.
Considering that our fourth quarter 2009, we expect total revenues to be in the range of $1.81 billion to $1.85 billion and we expect diluted earnings per share for fourth quarter 2009 to be in the range of $0.84 to $0.88 per share. For the full year 2009, we expect diluted earnings per share to be in the range of $3.45 to $3.50, an increase from prior full year 2009 diluted EPS guidance of $3.20 to $3.38; now again about $0.14 of that increase is related to the change in our assessment of the purchase price allocation to EMBARQ and the amount of depreciation expense that were booked.
Finally we expect capital expenditures for fourth quarter 2009 to be in the range of $280 million to $300 million which would bring full year pro forma 2009 capital expenditures to $940 million to $960 million. That concludes my prepared remarks for today. At this time, I'll ask the operator to provide further instructions for the question-and-answer portion of our call.
(Operator Instructions) First question comes from Frank Louthan.
When will you all consider returning cash to shareholders? Are you looking at buy backs? Are you still looking maybe, wait until you have had EMBARQ on your belt for a year or will you potentially look at that earlier than that? Then looking at potential M&A had a little change of strategy with Windstream buying a CLEC. I know you have much, the [wide] core assets have been beneficial to you. Is that something that you would be interested in especially now since you are in more urban markets looking at some pure plate CLEC assets as potential M&A candidates down the road? Thanks.
Regarding returning cash to shareholders, that is something our board talks about on an almost continual basis. I believe it would be sometime next year before we really will address this issue or opportunity. As you know we've had a history of returning substantial amounts of our free cash flow to shareholders. If you think up to the (inaudible) acquisition, we returned about 90% of our free cash flow to shareholders over about a five year period.
We'll continue to look at those opportunities. Of course, several factors will come into play there. First of all we think it's important to remain investment grade. We'll look at our internal and external expansion opportunities that could drive shareholder value and then of course our dividend payout ratios will be considered. But it is an issue our board will be looking at in a month ahead and the key there is to how can we best drive long term shareholder value and that's what will drive our decision.
Regarding Windstream buying the CLEC and where does the fiber acquisitions? We don't see ourselves buying any CLEC in the foreseeable future. Right now of course, we are focused on successfully integrating the EMBARQ properties, getting this merger done right. We do offer CLEC services, I think in about 12 markets now across the country and they are doing well; almost every market is doing pretty well right now. So, we are in that business, we understand it well and as opportunities arise we'll look at those. But right now we are focused on integrating the EMBARQ properties.
Our next question comes from Simon Flannery.
You've had the EMBARQ transaction now for a couple of months. Perhaps you could give us an update on where you are feeling positive and maybe some issues still to work through on the integration. We've obviously seen some very good numbers on line loss as well. Perhaps you could just talk to what is driving some of that. Is that more on the gross ends, is it more about disconnects, is it more about the economy? Some color around there would be really helpful. Thanks.
Nothing I see really concerns me at this point. The SAP conversion was going extremely well. We've had our first billing, customer care provisioning conversion in the state of Ohio. It's going very, very well; very little customer impact, very seamless from a customer standpoint. That is a major step for us in moving forward with the integration process. So, that's going well. We saw improvement in the larger EMBARQ markets; as far as in Florida, we saw a 22% improvement in access line losses, saw some significant improvement in Nevada as well. Now the jury is still out there. We are not declaring victory yet in those larger markets but if you look at the third quarter, we did make significant progress on access line loss and also in turning around what had been a negative or losses from a high speed Internet stand point, we actually added high speed internet customers in both of those markets. So, significant progress in these large markets which has been one of the bigger concerns we've had obviously.
We have always been confident in the smaller markets. We could bring them [live over] the CenturyTel market penetration levels and access line levels over time. So, again no major issues that I see and just a matter of getting, just working through. Our teams at CenturyLink has done an amazing job with the integration and we'll continue to get through this and hopefully drive more value with the transaction.
Our next question comes from [David Martin].
Maybe just a couple of housekeeping items; Stewart, the results said, we have got some one time revenue settlements in the results this quarter if you could kind of break those out, and if you can revisit the pro forma line numbers from a year ago consumer and business that would be helpful. Just a bigger picture, Glen, kind of building on that question before, you guys are now kind of operating in markets like Las Vegas, larger markets, more competitor intensive markets; you have unlimited wireless providers in these markets. Could you kind of compare and contrast a little bit your experiences thus far in these newer, more competitive, more urban markets relative to your experiences in the rural markets. What lessons you think you can bring back and what lessons you can translate into those markets? Thanks.
David, from a revenue settlement standpoint, there was about $7 million in the third quarter of favorable revenue settlements which represented settlements with two carriers of about equal amount.
The pro forma line numbers?
On the pro forma lines, there was an improvement, just year-over-year with a 16% improvement, most of that driven by consumer, and we did have a decline year-over-year in business. However, business did improve sequentially. Essential what (inaudible) on the business, just fewer business starts, it's an inward issue for us.
Do you have the actual line counts from pro forma basis from third quarter last year?
Last year the total line count was 202,612, that was ending, that was a loss versus the 169,825.
If we have to take that off line, that's fine.
‘08 basically residential lines were about 5.4 million and business lines were about 2.5 million.
David, regarding the larger markets, they are different. They have just got more competitors and greater density, a lot of activity there. A couple of things we found is that local market focus, we believe is effective whether it's a rural market or urban market and that's what we are driving here as quick decision making further down in the market, getting more input from folks on the street, our local management regarding the messaging and the packaging and the advertising in those markets, and really an aggressive Broadband focus. Longer term we have to determine are these markets conducive to video? I think that’s where we could really win here, if we can go out video. We are in the process of making those decisions. For competitive reasons I am not going to discuss where we are with that but that is the other opportunity here in these larger markets. So, it’s a lot of granularity involved here and it’s just really getting down and working in the market. Like I said, we haven't seen it all. I don't say we have got it all figured out, but our initial view here has been positive.
If I can just follow up on that. I mean, Glen, do you see that these are markets that are risks. There are anchors and you are trying to minimize their negative qualities, or do you see these markets as having genuine opportunities that you can exploit?
I believe they have genuine opportunity that we can exploit here. I think it's really positive for us long term, and if we can bring the broadband focus from the local market focus, we believe we can. We think it's an opportunity for us.
Our next question comes from Michael McCormack.
Hey guys thanks. Could you talk a little bit, Glen, you mentioned some improvement in line trends, some of those EMBARQ markets. You think it’s due to housing improvement versus taking a share from cable competitors? Then secondly just your thoughts on the pretty strong DSL numbers in the quarter. Obviously doing some promotions, but give us a sense if you will, the differences between the legacy CenturyTel versus legacy EMBARQ market, as to what really drove the beat there.
I'll ask Karen to answer that and I’ll maybe add something to what she says.
The improvement that we saw in the larger markets was really driven, Mike, around the out improvement, and really three categories. The Mover churn is down, so lot of people moving out of the market. The competitive churn was down in these larger markets. So I think that's again a result of more of our aggressive local marketing there.
The economic that would include non pay was down year-over-year. So it's more of an out. We did see inwards are still down year-over-year, but we are seeing an improvement and we believe that’s because we are going after the non customer with the Pure Broadband and our $14.95 DSL promotion, the playbook that we had at CenturyTel legacy market seemed to be playing very well.
I would add to that that our channels are executing well. We put a lot of focus in the last couple of months, this past quarter on execution and the channels in particular the [call channel]. They have done well. Our service delivery, we are focused on our service delivery intervals for our customer and improving those as we speak. So, it's really an end to end operating model improvement.
Did you get any sense during the quarter on slow share for high speed versus the universal cable competitors?
We don't have flow share specifics, Mike, but we do believe that we are taking some win backs.
In terms of the DSL, again same build there. It's increased focus with the operating model, the aggressive, we actually improved our cost nearly 50% shifting from media to very targeted DM to non customers as well as our promotional and in the channels we improved execution and service delivery, so it’s an end to end process there.
Mike, I might add. The improvement there was in the EMBARQ market, CenturyTel market frequency equal to the second quarter.
Our next question comes from Chris Larsen.
A couple of questions. First, more clarification actually. In the fourth quarter guidance that you gave I assume that also has a similar $50 million of accounting pressures, or the change in accounting, and that a similar number also in the OpEx that we saw in the third quarter.
On the charge for the headcount reductions, it sounded like it was unexpected. Could you talk through? Where there people that decided to opt for a change in control position more than you expected, and is that going to put you in a position where you are hiring back headcount? Thanks.
On the accounting charge impact, yes, the result of getting off of the regulatory accounting will result in a $55 to $60 million reduction in revenues in fourth quarter compared to fourth quarter a year ago on a combined basis. And also a $55 to $60 million reduction in expense in the fourth quarter compared to the fourth quarter a year ago on a combined basis. So no cash flow impact to that adjustment.
Not to put words in your mouth, but if not for that change in accounting, it would seem that revenues in 4Q would have gone up at least compared to where street was modeling the fourth quarter. Is that fair?
I am not sure about compared to where the street was modeling. It would be down a little bit from our announced third quarter results.
And in terms of the charge for head count reduction, basically what happened there is we record 100% of the severance when we basically identify and notify people that they are no longer, that they are going to have a last day at work basically.
So it's not really, we don't expect to have to back fill vacancies or anything like that. It's basically just that we were able to identify people sooner and notify people sooner. Once we notify them they may have a last day work that’s six months out, but we still booked all of their severance in the quarter during which they were notified and that it was identified and that it was known.
Again their severance plan the way it works, those cash payments are made after the person actually leaves the company over the period of time that the severance period runs. So in other words, if you have 26 weeks of severance, you receive the cash payment over a 26 week period.
Our next question comes from Chris King.
Just a broad question and then a couple of specific questions I guess regarding Broadband availability, now that you have your hands on all of the EMBARQ assets. I know you guys agreed to certain levels of broadband availability with the FCC to get the deal done.
Just was curious if you had a firm number of additional households that you plan on covering over the next several years and what that number would be? I was just wondering if you can give us a sense of the total cost that you guys have budgeted over the next several years for additional customer broadband availability, and what type of trajectory that availability may take over the next several years?
Chris, we don't have exact numbers, the number of households. We have made commitments and they really are based on residential. All 1's and B1's, we call them primarily lines. We have committed of course to have 90% of our lines, and we have committed to have 1.5 meg to 87%, and 3 megs to 80% of our lines.
We are already after the first quarter we come pretty close to the 90% level, and we are not far off the 1.5 meg at 87%. We are a little further to go on the 3 meg but we'll achieve that over the next 24 months we think. So we are on schedule to get that done.
We'll do that within our current capital budget structure. So we fell good about where we are with that, we are hitting those numbers, but we don't have the specific number of households.
Our next question comes from Sam Haran.
Two or more broad question. One on the cable. Do you have any update on what the overlap is of cable telephony, and then are you seeing any meaningful change as capable upgrades their speed process 3.0, are you worried about the competitive impact?
Then a more strategic question, Glen. When do you think the synergies get completed now where EMBARQ is fully integrated? Do you see more opportunities for line acquisitions either out of incumbents or from other your peers out there? Thanks.
First of all on the overlap, we are, total combined company, we're at 65% to 70% telephony overlap. We are hearing the cable company’s talk about, I think in Las Vegas about DOCSIS 3.0, but that's the only place where we've seen any upgrade leading to discuss about our cable competitors at this point in time.
We are in the process of course increasing our own speed in a lot of these markets. The progress with the integration of EMBARQ, yes, it is, we are pleased with that. We are very focused on that but we think we are also well positioned as a consolidator in this sector, and if you look at our size, our balance sheet and cash flows our success with at par with the integration. With EMBARQ, we are well positioned to continue the consolidation, no matter what. We believe we can drive real value for shareholders with additional consolidation and we'll be considering that in the months ahead. We are still looking foremost to get this integration done right and then we'll consider other opportunities.
Do you think there's another six months left on the integration, and with something like of fair point be of interest to you?
I won't talk about specific opportunities, but integration is going to take we've said from beginning, 27, 28 months probably, because all the billing conversion is done, completed. What we've targeted is 27, 28 months time frame for that, but we do believe in six months or so we are going to be in a position to consider other opportunities that may come about.
Our next question comes from Batya Levi.
Two questions. One follow-up on the revenue side. It looks like pro forma revenue declined improved a little bit in the third quarter on an annual basis, but you are looking for a worsening trend in 4Q. Can you talk a little about the drivers for that expectation, does that embed maybe higher line losses or maybe more pressure on the regulatory side?
Another question on margins; looking at the pro forma margins, I believe margins were down about 100 basis points on a sequential basis. This excludes integration costs, but has the synergy helped. So can you just talk about where the pressure came from? Was there more branding expense that was not included on the integration side?
Batya, on the revenue side, basically I think the largest item there is the $7 million of one time revenue that we had in the third quarter related to some of the prior period settlements with other carriers, which again wouldn't reoccur. We wouldn't expect to reoccur in the fourth quarter. So that I think is contributing to the revenue decline in 4Q.
In terms of margins, down about 100 basis points. First of all, we excluding as integration cost the branding costs that we are incurring, as we are the other integration cost. It's not really that. I think it's just the declining revenue contributing to a decline in margin from quarter-to-quarter. I have to look more to details to just see if I can explain to you better, and see if there are any one time items that we expect in the fourth quarter, but I'll get back to you on that.
Our next question comes from Michael Rollins.
Just a question on the revenue profile, I was wondering if you could talk a little bit about the segments of revenue in terms of consumer business and wholesale, similar to the way EMBARQ disclosed some of the numbers and similar to the way some of your peers have started to disclose it.
I'm wondering in the sense of, if you look sequentially, how we should be thinking about the rate of decline or change in each of those segments? Do you feel now with the change or evolved portfolio that you (inaudible) little more urban on top of the rural, do you think you'll see different types of elasticity in an economic recovery scenario? I'm just curious if you can give us some sense on that on a revenue growth perspective?
In terms of the segments of revenue, consumer business and wholesale, I think we are going to continue to report as we have in the past basically. We do give some detail. The business and the consumer is really mixed in the voice and data revenue. We break out basically voice revenues, network access, which is the predominant piece of the wholesale revenue, data revenues, which again are both business and consumer, and fiber transport and CLEC, which are again wholesale revenue, and then we have the other category. So we expect to continue to break that out as we have in the past.
In terms of the different levels of elasticity across segments during the economic recovery, being that we'll have a higher percentage of business customers now in the more urban markets that EMBARQ served, we would expect to see and participate in the economic recovery as businesses do stop declining and start expanding in some of the areas that we serve. So we would expect to participate in that, and we are focused on that, and that should be provide some lift to us over time as the economy turns around.
Just on the consumer side, just a follow-up. I realized you don't report in this way, but do you have a sense of where the average revenue per household is in the residential business today and how that compares to what the competition is doing out there on a combined voice and broadband basis?
I will answer that. The average revenue per consumer household is $58.40 ARPU, the marketable revenue piece, and as far as what our competitors see, our pricing is very competitive. If you see a triple play bundle, a video bundle, ours is going to be competitive with what you are seeing. It's just a matter of the make-up of customers and the type of customers you have in any given market.
Our next question comes from Donna Jaegers.
One question, you mentioned in the press release about the vulnerability next year on universal service fund and that you gotten notification from a wireless carrier that they wouldn't be using your network. Can you go into a more detail on especially the backhaul portion of that? What region have they given you notice on and what might be the vulnerability if that trend spreads?.
Donna, it's really not backhaul. It's basically access, where our current wireless carrier has their traffic (inaudible) that EMBARQ owned. They are basically moving that traffic over to their network, where they are establishing their own ability to be able to internally deliver that traffic, other customers' traffic. There's really not any other carrier that we have like that to that magnitude. So this is really pretty much the total exposure on that.
We are continuing to build fiber to sale sides in order to be able to capture some of the growing revenue traffic that's coming from the wireless carriers that has to transverse our networks, so as EMBARQ has been doing that in the past and that's probably from where we are going to continue to focus on the future.
In terms of universal service in 2010, really the decline there is due to just an increase in nationwide average calls per local loop. Our cost per loop basically continues to go down. So basically, it's just a reduction. Since our universal service unlike our wireless counterpart is based on our actual cost, as our cost go down in relation to the average cost, our settlements go down as well.
Then I think Karen mentioned that you guys have been running a broadband promo and if I caught it right, it was $14.95. Can you give us little more details on how long that entry price last and is that for 1.5 or is it for lower bandwidth?
It's for the lower bandwidth and it's the same promo that we've had in the CenturyTel markets for sometime. So it's a year-on-year contract.
Our final question for today comes from [Dave Comant].
I was just wondering if you could update us on plans with the 700 megahertz spectrum. And then also just any update on any cash contributions you may need to make for pension?
Regarding 700 megahertz, as you probably know, of course, in the legacy CenturyTel, we invested in the 700 megahertz spectrum, 55% of our access lines with 7 megahertz coverage with the EMBARQ transaction that coverage came down to 16%. We believe that it's an excellent spectrum and makes a lot of sense in enabling us to expand our global Broadband, and reach areas that we couldn't reach otherwise. Eventually it will allow voice as the handsets are being developed.
We are in the process of talking to other spectrum owners as well as with equipment makers. The question is, how much spectrum can we buy? Can we buy enough to make it meaningful to the overall operations of our company? Second, what will it cost us? What is the additional spectrum cost? What will it cost to build out the additional areas? So we are in the process, as we speak, basically working on this, and we are still weeks away and months away maybe, but we are in the process of working through this. It's very much a part of our focus right now.
Dave, on the pension plans, we've contributed collectivity with EMBARQ through the end of the third quarter $150 million to the pension plans and that was really all to the EMBARQ plan. CenturyTel made a $2 million or $3 million contribution to our plans earlier in the year. We do not expect to make any further contributions to the plans for the remainder of 2009. The status of the plans basically is that the legacy CenturyTel plant is virtually fully funded. It's basically, the PBO is $7 million higher than the assets in the plan as of the end of the quarter.
The EMBARQ plan is under funded by about $665 million, and they are due to pass contributions that have been made by EMBARQ. There are no required contributions to be made in 2010. The first required contributions would kick in at 2011. We will, in conjunction with finalizing our budget for next year, determine the contributions that we may or may not make to the EMBARQ plan. Typically, probably wouldn't expect us to make any more than $100 million to $150 million contribution in 2010, again even though none would be required.
This concludes our question-and-answer session for today. I would now like to hand the conference back over to Mr. Glen Post for any closing remarks.
Thank you. In closing, we are pleased with results for the third quarter. I'm also very pleased with the progress we have made thus far with the EMBARQ integration. I believe that we are well positioned to create significant value in the months and years ahead.
The third quarter financial results were successes of our initial post-closing marketing and operational activities, successful conversion into our SAP, financial and human resource assistance, and the completion of the first building customer care and provisioning systems, conversion provides strong momentum for continued integration and business plan execution.
During the coming months, we'll remain focused on serving our customers and successfully integrating our two companies into a cohesive strong service provider.
Thank you all for participating in our call today and we look forward to speaking with you in the weeks and months ahead.
Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a nice day.
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