BellSouth Corp. (BLS) Q3 2006 Earnings Call October 24, 2006 10:00 AM ET
At this time, I would like to welcome everyone to the BellSouth third quarter 2006 earnings conference call. (Operator Instructions) At this time, I would like to turn the call over to Nancy Davis. You may begin your conference.
Thank you. Good morning. Thank you for joining the third quarter 2006 earnings conference call for BellSouth. During this conference call we will refer to a slide presentation. The presentation, earnings press release, investor news, and our financial statements are posted on our investor website at bellsouth.com.
Let me point out that some of our remarks today may contain forward-looking statements. Actual results could differ materially from those projected statements. For a discussion of the factors that could cause actual results to differ, I refer you to our various reports on file with the Securities and Exchange Commission.
I will begin our discussion today by covering the BellSouth consolidated financial results. Pat Shannon, Chief Financial Officer for BellSouth, will cover highlights for the quarter and our business unit results.
To supplement the reporting of BellSouth consolidated financial information under GAAP, the Company presents certain non-GAAP financial measures, including normalized operating results and operating free cash flow. Normalized results from continuing operations include our 40% proportionate share of Cingular’s revenues and expenses that are recognized as equity earnings for purposes of GAAP reporting.
Normalized results exclude the impact of significant non-operational or nonrecurring items. I will review the normalizing items for the third quarter of 2006. A complete list of normalizing items as well as a full reconciliation of normalized results to GAAP reporting is included in the quarterly financial statements, which are also available on our investor website.
Slide 4 shows BellSouth's consolidated GAAP results from continuing operations for the third quarter of 2006 reflecting year-over-year in sequential improvements across all metrics. Reported revenue was $5.2 billion, up nearly 3% compared to the same quarter of 2005. Operating margin was 27.7% for the quarter and income from continuing operations was $1.1 billion. Reported earnings per share from continuing operations was $0.58, up almost 32% compared to the same quarter in 2005. Year-to-date reported revenue was $15.6 billion, a 2% increase compared to year-to-date results for 2005. Year-to-date operating margin was 25.6% while income from continuing operations was $2.7 billion. Year-to-date EPS was $1.51, an improvement of nearly 21%.
Slide 5, BellSouth's normalized results reflect top line and bottom line improvement for the third quarter and year-to-date. Normalized earnings per share for the quarter was $0.65, up 27.5% compared to the same quarter of 2005 as profitability improved at both the Communications Group and Cingular. Year-to-date normalized EPS was $1.79, nearly a 22% improvement from 2005.
Third quarter 2006 revenue grew 5.4% year-over-year to nearly $9 billion, driven by favorable revenue performance across all business units. On a year-to-date basis, normalized revenues were $26.5 billion, a 4.4% increase over the same period of 2005.
For the quarter, operating margin was 24.7%, up 330 basis points year-over-year, driven by margin improvement at Communications Group and Cingular. Year-to-date margins have expanded 240 basis points, reaching 23.2%.
Details of the normalizing items for the third quarter of 2006 are on slide 6. Adjustments to reported earnings per share from continuing operations including costs associated with wireless merger integration, wireless merger intangible amortization, and costs associated with the pending merger with AT&T. This quarter, the total impact of normalizing items was $0.07.
Now I'll turn the call over to Pat Shannon, and Pat will begin his comments on page 7.
Thank you, Nancy, and good morning. BellSouth's results for the third quarter continue to reflect strong operating momentum across all of our operating segments. Improving fundamentals and solid execution continue to drive strong earnings growth. This quarter marks our fourth straight quarter of double digit earnings growth with over 27% growth year-over-year.
Third quarter revenue growth accelerated across all segments, improving top line growth along with solid cost management drove normalized margins for operating income before depreciation and amortization to 40.1% at the consolidated level, the highest margins we've seen in the past two years.
Two years ago, we executed a strategy to realign our assets towards growth in domestic wireless and broadband. Our results this quarter continue to demonstrate the value of that investment redirection. And as you'll see later in the presentation, we also produced strong operating free cash flow, and continue to reduce capital spending levels from where they were earlier in the year.
Slide 8 shows revenue results for the market segments within the Communications Group. Total wireline revenue was up 2.4%. If we adjust that for the $44 million of one-time billing credits we gave in the third quarter of 2005 as a result of Hurricane Katrina, revenue growth in the Communications Group was 1.4%.
Our consumer segment delivered solid top line revenue results as revenues from increasing DSL and long distance penetration outpaced revenue lost from access line declines. For the quarter, consumer revenue was up 2.8% year-over-year and revenue per unit was up 8.1% to over $63.
Our small business segment continues to produce consistently strong sales results, with revenue up 10.6% year-over-year and up 2% sequentially. In the past year, we've added 115,000 access lines, with strong retention and reacquisition strategies and we've driven revenue per unit up 5.5% to more than $82 by increasing penetration of DSL and long distance services.
In our large business segment, revenue was up 2.3% year-over-year, the highest growth rate we've seen in more than four years, as growth in network data revenue and long distance, coupled with pricing stability, more than offset declines in legacy services.
Our wholesale revenue was down 1.8% compared to the same quarter a year ago and up 2.3% sequentially. Once again, local wholesale revenue, which includes union lines, dropped significantly with a 14.4% year-over-year decline.
Slide 9 shows the progress that we've made in wireline margins over the past year. Our operating margin before depreciation and amortization expanded 230 basis points year-over-year and 50 basis points sequentially to 44.5% in the third quarter. The improvement was driven by a few key factors.
First, between the $44 million of billing credits that we gave last year and the fact that weather-related costs in the third quarter of last year were approximately $16 million higher than this year, the third quarter margins were negatively impacted by about 130 basis points. So a more comparable margin to this year would be 43.5%.
Beyond that, we're benefiting from scale. Now that we're at scale with DSL, long distance, and increasingly emerging data services, all or a vast majority of the revenue from these services flows through to the margin and offsets the contribution decline from access line losses, or the substitution of legacy services. I'll show you a little bit more on that in a minute.
Second, we've also continued to focus on cost management. During the quarter, cost savings came from a reduction in force of 3,300 year-over-year and in addition, overtime is down, primarily due to less storm activity in 2006.
On slide 10 is an example of our shifting margins using some data from our consumer segment. This shows how we have more than replaced the contribution declines from lost access lines with profitable growth in DSL and long distance. The top left of the chart reflects the monthly recurring contribution for each of these three products.
On the right, we've given you the change in the average units in service on a year-over-year basis. Over the past few years, the product margin on access lines has remained fairly constant while the margins for long distance services has increased modestly. However, in the past year, the per unit contribution from DSL has increased over 50% as we reached economies of scale, maintained pricing discipline, and focused on improving our mix towards higher speed services.
Net-net, even as we've lost access lines, the rapid subscriber growth and improving profitability of DSL and long distance has resulted in a net positive to BellSouth's bottom line as demonstrated in the bottom of the graph.
And now we're beginning to see signs that year-over-year loss rates from access lines are flattening. Slide 11 gives quarterly year-over-year access line loss rates. We went back to the middle of 2004 just to give you a longer term view of the trends. We ended the third quarter of 2006 with 19 million access lines, down 301,000 compared to the previous quarter and down 6.9% compared to the same quarter a year ago. As you can see from these trends, the year-over-year loss rate appears to be flattening as the year-over-year decline was 7% in the prior quarter.
This trend is a new data point and it's influenced heavily by similar trends in the residential lines, as residential lines are down 8.7% year-over-year versus a 9.1% rate in the prior quarter and an 8.8% in the quarter before that. Total residential lines were down 265,000 for the quarter. The declines in access lines continue to be driven by wireless substitution and cable VoIP competition. We saw the absolute losses to wireless slow to some degree again this quarter and we did not see an acceleration of cable VoIP losses, which really reflects the fact that cable is becoming more fully deployed in the region. The absolute change in business lines improved sequentially to 33,000 lines lost during the quarter.
Our small business segment had another positive quarter with the addition of 20,000 lines. Retail large business lost 13,000 lines, reflecting an improvement from first half trends. Large business line loss continues to include customers migrating to data services and this trend has accelerated. This quarter, more than 40% of our line loss could be attributed to migration to data services, up from about 33% in the previous quarter. Wholesale business lines also declined 37,000 in the third quarter.
Slide 12 shows BellSouth's expanding broadband customer base. Our DSL customer base grew by 176,000 during the quarter, and at quarter end we served more than 3.4 million customers with a penetration of 18.4%. With the addition of more than 770,000 customers over the past year, DSL revenue grew 33% to $405 million in the quarter. Revenue was also driven by more customers choosing higher speed, higher revenue per unit plans.
At the end of the third quarter, more than 30% of the DSL customer base subscribed to 3 or 6 megabit services, almost double the mix this time last year, and our monthly mix of net adds has consistently been above 80% for 3 or 6 megabits all year, reflecting strong and steady migrations from lower speed services.
DSL revenue per unit was $40, up slightly versus last year, but down about 3% sequentially. Revenue per unit was impacted by the mid-third quarter elimination of the regulatory cost recovery fee from DSL customer bills. And although the fee was profit neutral it did reduce the ARPU by about $1.50 on a sequential basis.
In addition to solid DSL growth in the quarter, customers continue to add other services to their product bundles. During the quarter, we added 118,000 long distance customers and now serve 7.6 million customers with an average revenue per unit exceeding $17. We also added 65,000 DirecTV customers for a total of 756,000 video customers.
Slide 13 shows another impressive trend in the wireline business. Network data revenue growth accelerated to 12.8% in this quarter. This was our second straight quarter of double digit growth and the highest growth rate we've seen since the Internet bubble burst in 2001. Retail data revenue growth was up 19.5%, driven by continued strong growth in DSL, which was up 33%. Also, core retail data revenue, which excludes DSL, grew 9% supported by growth in emerging services such as metro Ethernet and VPN. Revenue growth in emerging services offset declines in revenue from legacy data products such as frame relay and ATM. Wholesale data revenue grew 3.3%, driven by continued strong growth in wireless transport, which offset modest declines in general transport.
Slide 14 shows the value Cingular is contributing to BellSouth's financial results, with an outstanding quarter of revenue growth and robust margin expansion. Total revenue was up 9.2% year-over-year, driven by subscriber growth, revenue per unit stability, and continued penetration of data services. Net adds for the quarter were 1.4 million, of which 928,000 were postpaid. Overall monthly subscriber churn was 1.8% and postpaid churn held steady at 1.5%.
Total revenue per unit was just under $50, including $6.30 from data services. Revenue per unit from data services was up 46% year-over-year and nearly 10% sequentially. Cingular continued its margin expansion driven by accelerated revenue from customer growth and stable revenue per unit combined with operational and merger-related synergies. Normalized operating income before depreciation and amortization margin was 35.6%, up 400 basis points year-over-year. Cingular's EPS contribution to BellSouth increased from $0.13 in the third quarter of last year to $0.20 in the third quarter of this year and now represents more than 30% of our EPS.
Our advertising and publishing group grew revenue 5.5% in the quarter, the eighth straight quarter of year-over-year revenue growth. Adjusted for one-time customer credits issued in the third quarter of 2005 for Hurricane Katrina, revenue growth was still well above its peers at 4.1%. Growth continues to be driven by strong electronic media sales, which grew over 40% in the quarter and sustained print growth of nearly 2%. Operating margins continue to be strong at 45.6%.
Slide 16 reflects trends in capital expenditures and free cash flow. As expected, capital expenditures continue to trend lower from levels earlier in the year. During the quarter, CapEx declined to $730 million. Year-to-date, capital expenditures were $2.8 billion and included $265 million in expenditures for Hurricane Katrina restoration. Operating free cash flow was very strong in the third quarter at $976 million, which included a more than $560 million cash payment for income taxes. Free cash flow was $2.5 billion year-to-date.
I'll conclude on slide 17. It was a great quarter for BellSouth. Our results reflect strong operating momentum and improving fundamentals across all segments of our portfolio. This momentum, along with the realignment of our assets has positioned us to produce strong growth in earnings and improved cash flows.
Improving wireline trends, continued penetration in new services, and continued cost controls have led to margin expansion in the Communications Group. Cingular's strong performance drove significant margin expansion and our Yellow Page business continues to be unmatched with industry-leading revenue growth.
Our merger with AT&T will bring about a more efficient and effective provider of broadband and wireless communications services. Currently ,the FCC has scheduled an open meeting for November the 3rd to consider the merger in the event the commission has not completed its review prior to that date. Now I'll be happy to answer any of your questions.
(Operator Instructions)Your first question comes from the line of Scott Goldman - Bear Stearns.
Scott Goldman - Bear Stearns
On the margin side you guys have obviously done a great job increasing ARPUs as well as maintaining cost controls. Aside from seasonal pressures we might typically see in the fourth quarter, is there anything that might pressure margins going forward?
Secondly on DSL trends, I think AT&T yesterday and you guys today, both a little bit lighter than we had anticipated sequential growth relative to last year, not as much. Wondering if there's anything on the cable competition side, maybe from the pricing side or are we at the point where we're reaching some sort of inflection point of penetration levels in broadband where it's a little bit harder to come by net adds? Thanks.
Sure. As far as the margins, the pressure is on our margins and the impacts that we've seen really over the last several years, there are no new trends in that. We have significant competition from cable in bundled services and that will certainly continue into the future. We'll continue to look at our costs and continue to realign those with the demands in the business. So again, nothing real new in the fourth quarter. There could be some seasonality around marketing expenses and things like that. But the trends are pretty well known in the wireline side of the business and I don't see anything really changing.
As far as the DSL trends go, our net adds year-over-year are down 14% and for BellSouth, that's more of a reflection of our shift in strategy to improve the mix than it is really a true drop in demand. I'll give you a few numbers. We added 176,000 net adds in 2006 in the third quarter, and I'll tell you that from a value creation standpoint, that 176,000 subscribers was far superior to the 204,000 that we added in the third quarter of last year and is due to the mix change.
We made a significant change over the last year to de-emphasize our lower speed product and really emphasize the 3 to 6 megabit product. So this year we actually added 89,000 more 3 and 6 megabit product customers in the third quarter this year than we did last year. Which represents an over doubling of that mix. And we had a net swing of 115,000 in the 256-K product because we actually lost about 30,000 customers this year in the lower speed.
So while it appears the absolute unit numbers are down, the increase in value is significant and it's really caused by this shift in focus that we've had towards the higher speeds more than it is a drop-off in demand.
Scott Goldman - Bear Stearns
Great, thanks. Anything on the competition as far as pricing goes from the cable guys? Are we still looking at the $99 triple play as being the primary competitor?
I think that is an offer that has caught a lot of traction. We also have a $99 offer in the market. Those offers tend to be lower bundles of products and are really designed to increase the call flow into the call centers and we've certainly seen that in early results of our trials around the $99 offer, and then we're able to upsell a significant number of those to higher speed products.
I think that the $99 offer has got a lot of traction as far as a marketing tool, but the number of packages that are actually being sold at that level is very low, I would assume for them as it is for us as well.
Scott Goldman - Bear Stearns
Thank you, Pat.
Your next question comes from the line of John Hodulik with UBS.
John Hodulik - UBS
A quick follow-up on the margin question. Looks like you're going to see annual margin growth in the wireline business. And as we look out and try to refine our combined company model here, outside of any fiber to terrestrial video strategy over and above what you're doing now, we've got factored in about 100 basis point decline each year for the foreseeable future. I guess what I'm hearing is that doesn't make sense, that you think because of the scale that it's actually getting on some of these new services that you would keep that number flat going forward. So just some clarification there is my first question.
On the access line, I think it's a pretty bullish numbers we got today on the residential side. You talked about what some of the drivers were, but maybe I missed it, do you think that you're going to see this sort of swing in the residential access line losses and that we can expect some improvement as we go forward from here?
Okay. On the margins, I can't tell you how to build your model, but I think I would look at what pressures you believed you were modeling when you had the 100 basis point drop and then I'd just analyze the current trends and kind of decide for yourself where you would put them. I'll talk about the access line trends in a minute, and I think with access line trends beginning to moderate some of the pressures that you've seen on the margins should begin to abate and then if you can continue the profitable growth of the DSL and LD, which is what we've been able to do for the last several quarters, things should be okay. I'm not going to give a prediction of the future, I'll let you model your own.
John Hodulik - UBS
It sounds like what you're saying is that you could see margin improvement as we head from '06 to '07?
Again I'm not going to give you any guidance. We're not in a position to do that right now. We certainly are happy with the trends that we're seeing. And as you know, and you've watched enough of these trends, the trends in this business don't flutter around. They don't come and go. That's another trend on the access line side that is very encouraging to us.
We've seen competition come into the small business market years and years before the consumer market and we saw a lot of line loss and revenue pressures as share was taken in that market. Then if you look at it, once the line loss started to slow, it was a steady, constant slowing of that trend until eventually it turned back positive.
On the residential side, if you go back, you can see the competition has been significant and growing over the last several years and we need a couple more data points, but it appears that we're reaching an inflection or a flattening of it. Now it's still high. You're still talking about fairly large year-over-year rates, but it does appear over the last couple of quarters that you're seeing a flattening of that year-over-year loss rate and potentially could see that turn back towards zero. But there's a long way to go from 8% to zero too.
John Hodulik - UBS
Makes sense. Pat I just want to thank you and Nancy for all the help you've given us over the years, you've been very helpful.
Thank you, John.
Your next question comes from the line of Michael Rollins with Citigroup.
Michael Rollins - Citigroup
Hi, good morning. I was wondering if you could talk a little bit more about small business. We've just seen a continuation of the growth in your small business segment and actually I think year-to-date in the quarter it was above Cingular's revenue growth. So I'm curious if you can give us some more thought about how much you think is share gains and low-hanging fruit from exiting competitors versus just a real secular change in that market? Maybe what, if you could even characterize it as an inning that we're in, in terms of if we're in the early stages of a some sort of secular expansion in small business, or whether maybe it is transitory because of that share. Love to get more of your thoughts on what you really see with that business?
Sure. I don't know the exact math of that, because I haven't looked at it that closely. It is both of those. We are clearly with the sort of demise of the UNI-P model in that market that the retail side is a beneficiary of the wholesale declines in some cases. The true growth rate on retail is probably inflated for some period of time while the wholesale lines roll off. But there's clearly share gains on new growth and that's very positive.
So I think typically this market has grown similar to the economy in the Southeast, so I would say that our small business growth is probably a little bit higher than the economy on a real basis and then the rest of it is just sort of the demise of the wholesale market, would be my guess.
Michael Rollins - Citigroup
Do you think that data is significantly underpenetrated for this segment and that might give you also some opportunities over time or do you find that in this arena data is pretty well penetrated already?
We have a pretty high penetration rate of DSL in small business. I think there's still some upside to get there. And then there's some higher speed services, even beyond DSL, that can be brought down market from the large business segment and then I think that will help as well. The LD is over 60% penetrated in that market. So, I think we've also been able to keep our ARPUs high. We've maintained pricing differentials between DSL for consumer and small business and I think that's helped our growth rates as well and the economics, especially.
Michael Rollins - Citigroup
Thank you guys very much.
Sure. Thanks, Mike.
Your next question comes from the line of Simon Flannery with Morgan Stanley.
Simon Flannery - Morgan Stanley
Okay, thank you. Good morning. A follow-up on the access line loss question, Pat. Can you characterize it in terms of is it a gross add or more of a churn improvement here? Are you seeing fewer people disconnecting or is it that you're getting more calls from people moving in who might otherwise have gone wireless or gone cable?
On the DSL, can you give us a sense of your footprint, what percent of customers can get the 6 meg today and your ability to grow that over time? Thanks.
As far as the access trends, I think if you look at sort of a year-over-year basis, a lot of it is a slowing of wireless substitution. We have seen, and I think we disclosed this over the last three quarters, we've seen a reduction in the absolute losses that we attribute to wireless substitution. Before those three quarters, for a good four to five quarters before that, the line loss rates were fairly high in wireless substitution, around 175,000 or so a quarter. We've seen some reductions to that .
It's still the largest driver of line loss in residential, but we've seen that trend slow somewhat. And then on the cable side, we're just really not seeing any acceleration in the losses. So, in the third quarter, the losses that we attribute to cable, I don't want to call it a new trend, it was slightly lower than what we saw in the second quarter. We characterize it as it didn't accelerate. I attribute that mostly to the fact that there weren't a lot of incremental launches.
The big players in most of the big markets have already launched. That they're in the market, they are taking share, we're losing lines to them, but the absolute amount on a year-over-year basis is not growing. So while we're still losing, we lost almost 270,000 lines in the quarter, which is still not good, it's just the absolute year-over-year rate again appears to be stabilizing and then should turn back as these two phenomenon sort of work their way into the trends. I don't know if that helps, but wireless substitution is the biggest driver right now.
Simon Flannery - Morgan Stanley
Okay. But do you lose most of your lines because people are disconnecting, or is it you're just not seeing the gross add activity that you saw a few years ago?
It's both. The new connects are down and they have been consistently down. Our flow share, and we measure our ongoing flow share, has remained relatively constant over the last I'd say 24 months and that certainly helps. So we haven't seen an erosion in the flow share. So then, if we're continuing that constant flow share, eventually that year-over-year decline is going to slow and I think that's what we're finally seeing now.
Simon Flannery - Morgan Stanley
And on the 6 meg availability?
Right now, it's somewhere between 25% and 30%. I think with some new technologies around, Mac Sync, which I don't really exactly know what it is, but that coverage can go up towards two times that. Like around 60% of the homes will get 6 megs. That's just with the Mac Sync technology. Obviously with our deployment of ADSL 2 plus and VDSL, the speeds will go up well beyond the 6 meg.
Simon Flannery - Morgan Stanley
Great. Thank you.
Your next question comes from the line of Jason Armstrong with Goldman Sachs.
Jason Armstrong - Goldman Sachs
Thanks, good morning. Couple of questions. One more question on the access line side and then just specifically on wireless substitution and just helping us think about how sustainable the downtick is. Did we reach a point where wireless sort of did its maximum damage and continues to tick down and maybe the incremental growth we're seeing from wireless, which is still very strong, is coming from segments of the market that are just less likely to disconnect their phones? Any sort of commentary there?
A separate question, WiMAX, we haven't talked about this in a while, but we've got a fair amount of experience now with WiMAX in parts of your footprint. I was just wondering if you can give us an update on the experience, how that's been so far, how the network has scaled, what sort of uptick you've seen and costs to deploy the network in parts where you have relative to your expectations? Thanks.
On the wireless substitution side, it's hard to pinpoint with any degree of accuracy what exactly the wireless substitution threshold's going to be. I think we've saw really in the '04 timeframe a tremendous acceleration of it. I think it was just a reflection of the price points in the wireless market reaching a certain level and crossing some of the price points on the wireline side. So you saw a large piece of the market sort of migrate over to it. From all the data that we have been able to study, we believe that that phenomenon over indexed in the Southeast; in other words, BellSouth had a higher loss rate to wireless substitution earlier than in some of the other parts of the country. So that phenomenon potentially has stabilized a little bit more in our region than in some other regions.
It's hard to say whether it will reaccelerate. I think if wireless pricing stabilizes in the ways that it appears over the last three, four quarters that it has, than I think that bodes well for sort of both sides of the fence. I think it bodes well for wireless profitability. It also bodes well for a slowdown in the substitution rate on the wireline side. But I think it's just trends that we're going to have to continue to watch.
Again, the positive thing is that trends in this business do not come and go and we now have seen three quarters in a row of a slowing of the substitution rate, at least in the Southeast, and I think that bodes well for the future. How far out can you take that and will it stop completely, I think we'll have to continue to watch the trends.
On the WiMAX side, we've had some good success. We have some deployments in the Southeast. New Orleans has been a good story for us. We have over 500 customers in New Orleans and some of that was out of need during some of the restoration efforts, but I think it's been successful there. We do have some other limited deployments throughout the region. I think the economics are still such that the question around the economics is can you get enough scale to support the investment on a tower by tower basis, and clearly in areas like New Orleans, that is the case.
In some of these outlying areas the question is, can you get enough demand even in a rural area to pay for it? Some of the trials have proved that that could work and some of them have not. Still a test bed of economics for us at this point.
Jason Armstrong - Goldman Sachs
In terms of being over-indexed initially, in terms of wireless substitution, what do you think that was, was it better wireless coverage in your markets, stronger regional operators like Alltel? What was the cause for that?
It's hard to say, it could be demographics. The earlier studies that we did on the phenomenon of wireless substitution was that the main driver was the need for voice services. So the lower the need for voice services the customer had, the higher propensity they were to migrate just to wireless. Also just economics. If they needed to be on a budget, then they would probably pick a cellular phone over a wireline phone. So those are the two aspect of wireless substitution that drove consumer behavior the largest. I don't know the demographics off the top of my head, but maybe we over-indexed on those two demographics.
Your next question comes from the line of Richard Klugman with Prudential.
Richard Klugman - Prudential
Thanks. Good morning. Not to beat up on the access line, I did have one or two other things, but I just wanted to make sure I understood, you said it's a long way to going from 8% down to zero. I assume you don't mean it's going to zero in the next X years, but I was curious where you do think it will be in the long run?
Since I don't believe the Company is going to go out of business, I believe it will hit zero at some point. Because if it doesn't, then we'll continue to lose lines until we have none left. I'll let you do your own assumptions for the future and we obviously have ours, but once this thing starts turning back towards zero, I do believe that it will stabilize.
We haven't disclosed our flow share and I'm not going to do it today, but if you look at a fairly steady flow share that we have in consumer, math would suggest that overall market share will end up at that flow share number, as long that remains constant. And then at that point, we'll hit zero and we'll grow access lines.
I think what you need to do is figure out, again, what you believe the flow share is in the market and then just like you would in a wireless business, you need to model that to say that at some point the market share will stabilize in our business, even on the consumer side. I know that people can't think back that far, but it will stabilize on the consumer side just like it has on the small business side and then at a minimum we'll be able to grow access lines with the market for access lines, whatever that market may look like.
Richard Klugman - Prudential
The wholesale true-up in Georgia, it seems to be a big driver of the improvement on your wholesale revenue. Can you quantify that for us?
It was $12 million.
Richard Klugman - Prudential
I just wanted also to echo what John was saying before. Thanks for all your help over the years, especially over the last few months as we re-rolled out here.
I appreciate it and we're glad to help.
Your final question comes from the line of David Barden with Banc of America.
David Barden - Banc of America Securities
Thank you very much, guys, and again thanks for all your help. Maybe just a few clean-up questions. The first would be, just on the large business side, Pat, if you could kind of elaborate a little bit on the growth. Whether that's more organic or whether you're taking share away from the Ts and MCIs still in that segment.
The second would be, just again trying to revisit the cost side of the equation, the margin improvement and just confirming if you had to divide cost improvements that you've seen this year into three buckets, especially running into the merger here. Number one would be organic; number two would be pulling forward some of the benefits of the merger like restructuring contracts with out of region long distance providers and that sort of thing. And then third would be burning the furniture, if you will, just things that you just don't need to spend on, in anticipation of a merger coming up.
The last question would be, just on the line side, would you characterize that third quarter line loss run rate as reflecting Comcast's full rollout in your territory, Florida included? Thanks a lot.
Large business, I think it's more organic than it is share gains. We've seen some great demands on the data side, especially with some of our emerging products like metro Ethernet and VPN. And we've had just great sales results across those markets. The line loss has slowed a little bit and more of that line loss is attributable to up sales into data services. I think it's just the economy is good in the Southeast. The demand for the products is good and we've again seen a return to growth that we haven't seen in quite a while. So I think it's positive.
Stability in pricing is also plays an important role in this market, because we've always had fairly good volumes, it's just the pressure on the pricing side over the last really several years has caused the growth rate to be muted. Now with a good, solid volume growth and then an abatement of the pricing pressure, you're seeing some modest growth coming back into that. I think that's welcome.
Then the margin, our costs aren't significantly down. I think what we're really doing is just controlling them from growing. In our business, controlling our costs from growing with our cost structure means head count. We talked about that a lot over the painful last five years of what things we've had to do. We are down 3,300 heads year-over-year. We did a significant reduction in the last quarter of management at about 1,300 which saved a considerable amount of money year-over-year.
As far as pull forward of any merger benefits, there's really been none of that. We have in the quarter slowed some spending around projects and that certainly had some positive benefit on the bottom line on IT expense, but I'll tell you that that was completely offset by some accruals on equity-based compensation that we took. Those pretty much offset each other. Neither of these trends are permanent trends. So they've kind of offset each other at the expense level.
So it's mainly the margin improvement is maintaining our expense levels through managing our head count and then just having a modest growth at the top line really drives a very leveragable cost stream up and down, and I think that we're just now benefiting from all the hard work that we've done over the last five years. With the return of modest growth, we're seeing our margins go back up.
Comcast has not launched in South Florida and we continue to look through and try to find out when they plan on it, and we have no idea when their planned launch is. I don't think its imminent at this point. They have relaunched in Atlanta. They've been selling service here for over five years but now they've relaunched under VoIP and they're having some limited success. No more success than some of the other players have in some of the other markets.
They did launch in Augusta I think this third quarter and in some of the other markets that they have in Knoxville and Nashville and Charleston, South Carolina. So, I think they're becoming more fully deployed, but the big area for them is South Florida and I know of no plans they have to launch at this point. I'm sure that they will eventually.
David Barden - Banc of America Securities
All right, guys, thanks much. Best of luck to everybody.
And we do now have time for one additional question and that comes from Jason Frazier with Raymond James.
Jason Frazier - Raymond James
I was also just follow up on nice enterprise. Would it be possible to quantify the difference between your pricing base and the point of sale pricing? And also again to follow up on the small business. Are you guys doing any additional initiatives maybe in the quarter or offering additional services to this segment to maybe spur this growth? Thanks.
As far as the pricing in large business, I don't have that data point and I probably wouldn't share it with you if I had it. On the small business side, we haven't done anything extraordinary. I think you've seen the momentum in the sales in that group just build over the last three to four quarters. I think this is just a continuation of that momentum, but there's been nothing out of the ordinary or extraordinary that we've done other than continue to execute in both reacquisition, retention, and just upselling into higher-priced bundles and better data products.
Jason Frazier - Raymond James
Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I will now turn the call back over to management for closing comments.
In closing, we appreciate your time and your interest in BellSouth. Should you have any further questions, I encourage you to contact Nancy Davis and the other members of our Investor relations team. Thank you for joining us this morning. Atlanta is out.
Thank you for participating in today's BellSouth conference call. You may now disconnect.
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