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CenturyLink (NYSE:CTL)

Q4 2010 Earnings Call

February 15, 2011 11:30 am ET

Executives

Tony Davis - Vice President of Investor Relations

Glen Post - Chief Executive Officer, President and Director

R. Ewing - Chief Financial Officer and Executive Vice President

Karen Puckett - Chief Operating Officer and Executive Vice President

Analysts

Donna Jaegers - D.A. Davidson & Co.

Batya Levi - UBS Investment Bank

Frank Louthan - Raymond James & Associates

Timothy Horan - Oppenheimer & Co. Inc.

Simon Flannery - Morgan Stanley

Scott Goldman - Bear Stearns

David Barden

David Coleman - RBC Capital Markets, LLC

Operator

Good day, ladies and gentlemen, and welcome to CenturyLink's Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Tony Davis, Vice President of Investor Relations. Mr. Davis, you may begin.

Tony Davis

Thank you, Syed. Good morning, everyone, and welcome to our call today to discuss CenturyLink's fourth quarter 2010 results released earlier this morning. The slide presentation we will be reviewing during the prepared remarks portion of today's call is available on CenturyLink's IR website at ir.centurylink.com or the Investor Relations section of our corporate website at www.centurylink.com. At the conclusion of our prepared remarks today, we will open the call for Q&A.

Now turning to Slide 2. Slide 2 contains our Safe Harbor language for your information. We will be making certain forward-looking statements today, particularly as they pertain to guidance for 2011, the Embarq integration and the pending acquisition of Qwest and other outlooks in our business. Please review our Safe Harbor language found in our press release and in our SEC filings, which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements.

Moving to Slide 3. We ask that you also note that our earnings release issued earlier this morning and the slide presentation and remarks made during this call contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available in our earnings release and on our website at www.centurylink.com.

Turning to Slide 4. Your host for today's call is Glen Post, Chief Executive Officer and President of CenturyLink. Joining Glen on our call today is Stewart Ewing, CenturyLink's Chief Financial Officer. And also available during the question-and-answer period of today's call is Karen Puckett, CenturyLink's Chief Operating Officer. Our call today will be accessible for telephone replay through February 21, 2011, and accessible for webcast replay through March 7, 2011. For anyone listening to a taped or webcast replay of this call or for anyone reviewing a written transcript of today's call, please note that all information presented is current only as of February 15, 2011, and should be considered valid only as of this date regardless of the date listened to or reviewed.

As you turn to Slide 5, I will now turn the call over to your host today, Glen Post. Glen?

Glen Post

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

First, we reported solid results for the fourth quarter and for full year 2010. We achieved operating revenues in the fourth quarter that exceeded the top end of our guidance, and diluted earnings per share near the top end of our guidance. Operating revenues for full year 2010 were $7.04 billion, representing a year-over-year increase of 41.6%, primarily driven by the mid-2009 acquisition of Embarq along with the continued growth and strategic revenues.

Second, we achieved solid high-speed Internet subscriber additions during the fourth quarter and full year 2010 resulting in an annual subscriber growth rate of more than 7%. Additionally, we improved our absolute access line decline by more than 20% for full year 2010 compared to pro forma full year of 2009.

We also continued the expansion of our Prism, our IPTV service, and we're expanding our Ethernet Private Line Service across our footprint to better serve our business and wholesale customers. Now the integration of Embarq continues to proceed well and we continue to make good progress towards completing the pending Qwest transaction.

Now moving to Slide 6 in the deck. Operating revenues were $1.72 billion for the quarter, slightly ahead of the $1.71 billion top end of our guidance. Diluted earnings per share, excluding non-recurring items, were $0.76 per share, $0.01 lower than Street consensus according to FirstCall.

Our cash flows remained strong as we generated free cash flow of $342 million in the fourth quarter, excluding $9.1 million of capital investment related to the Embarq integration. Additionally, we achieved approximately $85 million of total operating expense synergies associated with the Embarq integration during the fourth quarter, ending the year with annual run rate synergies of $340 million.

There were a few factors that contributed to our operating revenues exceeding the top end of our previous guidance for the quarter. First, we lost fewer access lines that we had forecast for the quarter. Second, our access benefit use declined at a slower rate than we had anticipated for the quarter. And finally, we had a couple of prior-period true-ups that positively impacted revenue. There were also a few expense items that were higher than we had anticipated for the quarter. First, we incurred higher pull rental expenses than anticipated due to seasonal cost adjustments under certain contracts. And second, we incurred higher contract labor and overtime charges than expected, driven by the expansion of our IPTV service, weather impacts and conversion initiatives.

Demand for our strategic products and services continues to grow and strategic revenues are increasing as a percentage of total operating revenues. In fourth quarter 2010, strategic revenues accounted for 31% of revenues compared to 28% in fourth quarter 2009.

The growth in strategic revenue as a percentage of total operating revenue is a positive trend that we are focused on continuing, and which we expect reliance on revenues from traditional -- reduced reliance on revenues from traditional legacy voice and access sources. We remain focused on positioning CenturyLink as the broadband provider of choice in our markets, and we continue to enhance our broadband product portfolio through deploy higher speeds in key markets, as well as adding incremental value through broadband features, such as computer support and online backup services.

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

Now turning to Slide 7, I'd like to cover a few operating highlights for the quarter. First, we've added nearly 29,000 high-speed Internet customers during the quarter as demand for broadband remains solid and customers were continuing to respond well to our broadband offers. We ended the quarter with approximately 2.4 million access lines customers or 42.1% penetration of our broadband-enabled access lines and approximately 38.5% penetration of total addressable access lines. We were pleased that we were able to add more than 158,000 high-speed Internet customers during 2010, representing approximately 7.1% year-over-year growth in total high-speed Internet subscribers.

In addition, we experienced lower access line losses during the quarter than we had previously anticipated. Our fourth quarter line loss of approximately 123,000 represents a 12% sequential improvement over the third quarter 2010 and a 15.8% improvement over fourth quarter 2009 access line loss.

We continued to see a decline in outs and disconnect orders in both the Consumer and Business segments, which we believe is attributable to a more stable economy, resulting in fewer moves, less business line downsizing and fewer competitive ports.

We're pleased we have been successful in reducing our rate of line loss for the trailing 12 months ended December 31, 2010, to 7.6% compared to a pro forma 8.8% trailing 12 months line loss a year ago. One of the keys to this ongoing improvement in customer loss has been the performance of the top five Embarq markets. We continue to see strong tracks in these markets and improvement continues to outpace the rest of the company.

We also continued to strengthen our competitive position with partnerships, new product launches and continued execution. This morning, we announced our agreement with Verizon Wireless to offer Verizon Wireless equipment and service plans to our residential and small business customers. We're looking forward to, later this year, offering a complete product bundle including wireless to all of our customer base.

Our processes for selling DIRECTV are now fully implemented, and we're seeing strong results, adding nearly 40,000 satellite video subscribers in the fourth quarter. We ended 2010 with almost 628,000 satellite video customers. We also currently offer our CenturyLink Prism service in five markets across La Crosse, Wisconsin, Columbia and Jefferson City, Missouri and our newest markets of Las Vegas, Nevada and Fort Myers, Naples, Florida. We've exceeded our internal forecast for customer net gains this past year, and we’re pleased with the progress we are making with our Prism TV service thus far.

The number of Prism capable households passed increased more than 60% in the fourth quarter and we continue to expect the pass close to 1 million households by the end of this year. We continue to expect to roll out Prism TV service in three additional markets in 2011, bringing CenturyLink's Prism TV to a total of eight markets.

In our Enterprise segment, we lost Enhanced Ethernet and are providing MPLS DIE [ph] and PRI [ph], zone pricing in a number of key markets. In our Enterprise segment, we expanded our MPLS reach by completing a wholesale agreement with Qwest and added key value-added capabilities to our Ethernet product set. Now this set will provide opportunity for larger multi-site MPLS sales, particularly to larger government, healthcare and regional banking sectors. Our operating model with local sales and operations depth, now coupled with national data capabilities, is enhancing our position in IP data network opportunities.

Now turning to Slide 8. We continued to face a number of challenges during the quarter including a very competitive marketplace, a high unemployment economy and all of the Embarq integration and pending Qwest merger planning activities we have in process. However, we continued to generate strong cash flows for full year 2010. Our operating cash flow, excluding non-recurring items, was approximately $3.62 billion in 2010. Full year 2010 free cash flow was nearly $1.63 billion.

Our strong cash flows continue to support the return of cash to shareholders. We’ve paid $220 million in dividends to shareholders during the fourth quarter, $878 million in dividends during the full year of 2010. Our strong cash flows support the continued payment of dividends to shareholders and our 54% payout ratio continues to be one of the lowest in our industry.

Turning to Slide 9. We continue to make great progress toward completing the integration of Embarq. Our fourth market conversion, which will be all our customers in the State of Florida, is scheduled to occur by the end of the first quarter. We also remain on schedule to complete the fifth and final Embarq customer billing conversion by the end of third quarter of this year.

We have completed the migration of Embarq long-distance customers, representing 400 million minutes of use per month to the CenturyLink IP network, which eliminates, of course, third-party carrier cost for the company. And we continue to see improvement in urban market operating results and we're consistently meeting our synergy targets, so we're extremely pleased with the Embarq integration.

Now moving to Slide 10. We continue to move steadily ahead with the approval process and integration planning work for our pending acquisition of Qwest. To date, we have received 18 of 22 regulatory commission approvals required to complete the merger. We continue to work with the remaining four regulatory commissions and the Federal Communications Commission on the remaining approvals. While it is difficult to predict the timing of these remaining regulatory approvals, we currently expect to receive all required regulatory approvals by the end of the first quarter. Therefore, we are currently planning for an April 1, 2011, close and the launch of our combined company. Of course, we do not control the regulatory process and therefore, the close date could be moved out if the remaining approvals take longer than we currently anticipate.

We continue to make good progress in the organization design and planning of the many integration activities required to integrate the two companies, organization design is complete. Employee selection is now underway and we should be substantially complete with those in the next few weeks.

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

R. Ewing

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

Turning to Slide 12. I want to begin by reviewing with you a few significant non-recurring items that occurred during the fourth quarter, and then I will discuss the fourth quarter normalized results. First, we incurred approximately $27.2 million of pretax expenses or about $0.05 per share related to the integration and severance costs associated with the Embarq integration. Second, we incurred about $7.1 million in pretax transaction and integration costs or about $0.02 per share related to the pending Qwest acquisition. Third, we had a pretax curtailment gain of $20.9 million or $0.04 per share associated with freezing our defined benefit pension plan and related to future accruals. Last, we had other net tax benefits that collectively amounted to about $0.01 a share. In the aggregate, these items represent the $0.02 per share difference and normalized diluted earnings per share of $0.76 and GAAP diluted earnings per share of $0.74.

Turning to Slide 13. This slide reflects our results for fourth quarter 2010 compared to fourth quarter 2009, excluding non-recurring items for both periods as outlined in our financial schedules. For fourth quarter 2010, operating revenues decreased $118 million to $1.72 billion from $1.84 billion in fourth quarter a year ago. Our cash operating expenses decreased $38 million from $895 million in fourth quarter 2009 to $857 million in fourth quarter 2010, primarily due to synergies achieved from the Embarq integration. Depreciation and amortization expense increased from $356 million in fourth quarter 2009 to $365 million in fourth quarter 2010, primarily due to depreciation associated with increased plant and service that more than offset the decline in amortization under the declining balance method for our Embarq intangibles.

Net income attributable to CenturyLink for the quarter was $232 million compared to $287 million in fourth quarter 2009. And diluted earnings per share for the quarter decreased to $0.76 from $0.95 in the fourth quarter a year ago. The percentage decline in net income is higher than the percentage decline in operating cash flow due primarily to the smaller denominator.

This year-over-year decrease in net income and earnings per share is due to the anticipated revenue declines we've discussed with you throughout this year and the challenge of reducing cost in the near term due to the pending Qwest merger and the expansion of IPTV service to additional markets. Completing the successful integration of Embarq and planning for and achieving a successful integration of the pending Qwest merger are two of our primary focus areas.

Additionally, we are incurring startup expenses as we expand the offering of our IPTV service to additional markets and as we expand our high-bandwidth service offerings to enterprise customers. While the merger integrations in these product expansions impact our operating costs in the near term, we are confident that these represent investments in the future success and growth of CenturyLink.

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

Moving to Slide 14. I would like to discuss our 2010 results compared to our previous full year 2010 guidance. First, operating revenues declined by 6.5% in 2010 compared to pro forma 2009 operating revenues compared to our previous guidance of an anticipated full year revenue decline of 6.5% to 7%. Second, we generated $1.6 billion of free cash flow for 2010 compared to our previous guidance of $1.58 billion to $1.62 billion.

From a diluted earnings per share standpoint, the $3.39 per share we achieved for full year 2010 is at the high end of our latest guidance of $3.36 to $3.46 per share. Finally, we invested $864 million in capital expenditures in 2010, which is within our prior guidance of $825 million to $875 million. The capital that we invested in 2010 included the enablement of high-speed Internet service, IPTV in several markets, expansion of Ethernet availability and fiber to the tower. Our 2011 capital investments will continue to focus on these areas, which will enable future growth.

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

For full year 2011, CenturyLink expects operating revenues to be 4% to 5% lower than 2010 operating revenues, as revenue increases associated with growth in high-speed Internet are expected to be more than offset by revenue declines associated with lower access revenues, reduced Universal Service Funding, access line losses and other items. Additionally, due to anticipated revenue growth associated with the expansion of CenturyLink's Prism TV service, the revenue impact of the expected continued improvement in the rate of access line loss and the effects of additional fiber investment, we expect the year-over-year rate of revenue declines, excluding the Qwest transaction and any other non-recurring items that may occur, to be in the 2% to 4% range by fourth quarter 2011. The company currently expects 2011 capital expenditures to be approximately $1 billion or 16% higher than 2010 capital expenditures of $864 million. The increase is primarily due to planned incremental fiber to the tower investment.

We expect the Qwest transaction to close on April 1, therefore, we are not providing full year 2011 free cash flow or earnings per share guidance. However, we are providing guidance regarding several items that collectively are expected to negatively impact 2011 diluted earnings per share by $0.49 to $0.55.

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

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

For the first quarter 2011, CenturyLink expects total revenues of $1.68 billion to $1.7 billion and diluted earnings per share of $0.66 to $0.70. The decline in first quarter diluted earnings per share compared to fourth quarter is primarily due to continued decline in access lines, access minutes, the normal annual adjustment to USF revenue, increased payroll taxes and the continued expansion of IPTV.

Now turning to Slide 16. Finally, as we outlined in our press release this morning, there are several items I want to briefly discuss regarding the accounting rules for business combinations that you will want to consider when building a financial model for the combination of CenturyLink and Qwest. None of these items will impact cash flow.

First, purchase accounting rules require that the debt of Qwest be adjusted to fair value at the time of the merger close. Based on Qwest's outstanding debt as of December 31, 2010, the impact of this fair value adjustment would have decreased interest expense for pro forma full year 2011 by approximately $287 million compared to the expected levels absent the fair value adjustment.

Second, deferred revenues and related deferred costs on Qwest's balance sheet must be assigned a fair value. We currently anticipate the fair value of the deferred revenues and related costs to be assigned minimal to no value. Therefore, as of December 31, 2010, we estimate that pro forma 2011 revenues would have been negatively impacted by approximately $140 million and that pro forma 2011 operating expenses will be reduced by approximately $100 million.

Third, the tangible and intangible assets of Qwest must be reflected on the books of the combined company at their fair value. The fair value assignment may significantly impact depreciation and amortization of the customer base. However, the impact cannot be determined at this time.

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

This concludes our 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.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Dave Coleman. [RBC Capital Markets]

David Coleman - RBC Capital Markets, LLC

Glen, I believe you mentioned that in the fourth quarter, there was higher overtime and labor expenses. Can you just quantify how much that impacted the 4Q SG&A? I believe that's where it would be allocated. And then secondly, your revenue guidance for 2011 implies about a $30 million step down in the first quarter from 4Q 2010 but an equivalent amount decline over the subsequent three quarters. So was hoping you’d be able to walk through the items that will cause that change in revenue trajectory through 2011. And then final question. You outlined a number of items that’ll impact 2011 EPS versus 2010. Of that $0.49 to $0.55 adjustment or impact to 2011 EPS, how much of that would you say is a continuation of 2010 run rates versus new items in 2011?

Glen Post

I'll take the first one, Dave, and then get Stewart to take the last two. Regarding the fourth quarter higher overtime contract labor, that was about $10 million impacted the quarter from those expenses. And, Stewart, you want to talk about the revenue guidance?

R. Ewing

In terms of the revenue guidance, the $30 million decline that we anticipate in the first quarter compared with the fourth quarter, about $7 million of it relates to the decline in Universal Service Fund receipts that we received, which, again, is related to the normal adjustment that's made at the first of each year based on the nationwide average cost per local loop. We additionally, in terms of long distance declines in revenue, as well as network access and just basic voice revenue, is about $15 million or so from the fourth quarter to the first quarter. So that makes up the majority of the declines that we’ll see from fourth to first. And then 2011 versus '10, the EPS items in terms of how much is a continuation, basically, the items that impact the decline in revenues related to access line declines and minutes of use basically are items that do just continue from 2010 to 2011. I mean, we'll continue to see declines in those items. They’re new declines. They're not just carryovers basically. So there's really not very much in terms of carryover. There are a few items in terms of the wireless carrier that's migrating traffic off of the Embarq network, as well as some database lookup revenue that Embarq had, and that's probably in the neighborhood combined about $15 million or so, $15 million to $20 million.

David Coleman - RBC Capital Markets, LLC

And just one question on Prism IPTV, in the three legacy or older markets, can you say what the market share that you have at this point?

R. Ewing

Most of these are relative new markets, Dave. Really, we haven't disclosed that by market. And the market we’ve been in the longest, I’ll just give you that one, about 20% market share right now in the market we've been there the longest.

Operator

Our next question comes from David Barden. [BofA Merrill Lynch]

David Barden

Thanks for that revenue detail there, Stewart. It was helpful. But could we also get the one-time revenue contributor to the fourth quarter? And also, just again with respect to that first quarter guidance, it seems like if you do the math on the earnings versus the revenue change, it seems like more than 100% of the revenue change is dropping down to the pretax line. So not only is all the revenue dropping out of the EBITDA line, but more. So could you kind of help us understand what's going on here? Because I'm not sure we've seen, ever, more than 100% of the revenue come out of the company in a single quarter of this magnitude. And then the second question was just related to the tower fiber investment, which is a big incremental step up, a big investment on your part. Presumably, it's not a speculative investment. Could you kind of give us some more details about the economics around the returns on that money?

R. Ewing

Yes, let me get the second question first, the first quarter to the fourth quarter. Basically, the further decline in EBITDA is really due to expense increases that we'll see in the first quarter. One, we have about $10 million of increased cost associated with payroll taxes, basically starting over at the beginning of the year. And then secondly, we have some additional costs, probably about $10 million of an increase, fourth to first related to the continued rollout of the IPTV service. In terms of one-time revenue items to the first quarter, we had about $8 million of positive adjustments in total in the fourth quarter.

Glen Post

Dave, this is Glen. On the fiber to the cell investment, these are not speculative investments. Virtually, all of these investments will have five- to seven-year, mostly seven-year, contracts on these, that will guarantee our revenue streams and our returns for that period of time basically.

Operator

Our next question comes from Scott Goldman.[Goldman Sachs]

Scott Goldman - Bear Stearns

Just wanted to stay on the fiber to the cell investment that you have there. Wonder if you could just maybe put a little bit more parameters around how much of the incremental spend you guys are doing in 2011 is really related to that fiber to the tower. How many towers and kind of what a cost per tower might look like to help us think about that. And then, is this really kind of like a Qwest-like build where you can leverage that to bring fiber into more residential and business customers as well?

R. Ewing

Scott, for the incremental spend, virtually, all of the incremental spend over the last year, if you take the $865 million to $1 billion, it's all fiber to the cell basically. And if you look at the number of cells, we'll be building close to 3,000 cells this year. Cost per cell is in the $60,000 to $75,000 range, something like that. So that should give you just a range of what we're spending there.

Scott Goldman - Bear Stearns

And then just a follow-up in terms of the IPTV. Maybe you can give us a little bit more detail around what you're seeing in those markets in terms of the rate of line loss versus non-IPTV markets and how the economics have been scaling as you enter new markets there and then maybe a little bit better timing in terms of it sounds like Stewart's said about $10 million of IPTV costs in the first quarter. If I did my math right, we're looking at probably about $65 million for the full year. So is this a back-end loaded expense command of IPTV? Or how does that ramp throughout the year?

R. Ewing

Yes, you're right in terms of the increased expenses. The increased IPTV expenses in 2011 will be about $65 million or so over and above -- cash flow, rather, impact on cash flow. The impact on expense is probably about $85 million.

Scott Goldman - Bear Stearns

And how does that ramp throughout the year?

R. Ewing

I don't know. There’s about a $10 million expense increase in the first quarter, and it'll just ramp pretty much in a straight line from then to the end of the year.

Scott Goldman - Bear Stearns

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

Karen Puckett

In terms of the -- as Glen said on the churn, it's a 400 basis point kind of improvement we continue to see there. Attachment rate in the 90% range. What I would say, too, in terms of -- it's still very early for us in these new markets and we're scaling in a controlled matter; meaning, we churn up and know [ph], and we really kind of market in that node only. We're not going after a mass approach to make sure that we've got our processes constantly kind of retuned because as you bring new techs in to train, you want to make sure that those learning curves are accelerated. But I would say, too, that encouraging is for us to be competitive in our markets, we need an IPTV facility-based product that's going to help with our inwards. So if you just look at some of the new markets, 40-plus, 50% of our customers are new customers to CenturyLink so that's very encouraging, and we'll keep you posted as the trends change as we bring more of these markets up and scale the business.

R. Ewing

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

Operator

Our next question comes from Batya Levi. [UBS]

Batya Levi - UBS Investment Bank

I wanted to follow up on the guidance question. I believe your outlook for revenue decline especially the 2% to 3% decline by year end is better than what the Street is looking for. But when we put that along with the number of items you identified that will hit EPS by about $0.50, we could sort of back into it sort of margins we could see, and it looks like we’ve seen the peak in the third quarter and it's starting to trend lower to below 50%. Do you think this is a conservative guidance? Or are there more cost cutting opportunities that could drive them higher? And a second question I had on the broadband side. It looks like you expect broadband to be a larger contributor of earnings in '11 versus '10. But broadband and net adds look like they have stabilized. So can you talk about the pricing environment you're seeing there and maybe some sense of what speeds customers are taking?

R. Ewing

Yes, Batya, I guess the first thing, the guidance will all change next quarter once we're combined with Qwest and we start folding in synergies associated with Qwest. I would say, though, that the margins really continue to decline somewhat due to the continued rollout of IPTV, primarily, during the rest of the year, the remainder of the year just on a standalone basis.

Glen Post

I might add, too, on the expense side that impacted EPS, with anticipation of the Qwest transaction, we have not made cuts in costs that we would have normally, and that is having significant impact on our expense levels. So as we bring the companies together, we'll see back to more business as usual over the coming months, and our cost with synergy will be in line over time with our revenues.

Karen Puckett

And on the speed, about 20% of our customer -- we are seeing an increase in take rates on the higher speed, about 20% of our customers are on up to like a 10-meg service but the bulk of them are between five and 1.5-meg service.

Operator

Our next question comes from Simon Flannery. [Morgan Stanley]

Simon Flannery - Morgan Stanley

I wondered if you could just touch on the deal with Verizon Wireless. Is it a similar deal to the one that Qwest has already? Any sense of what the timing looks like and any cost from implementing that? And then, you've had a couple of days to look through the NPRMs from the FCC. Any updated thoughts on the U.S. acting [ph] into carrier comp proposals?

Glen Post

First of all, Simon, the Verizon deal is similar to the Qwest transaction. We'll be able to sell all the products and services, basically all the platforms. We think it's going to really enhance our ability to bring a full array of products, a full bundle, to our customers including wireless. As far as the cost, the cost we'll incur primarily are system costs over time as we bring the billing and begin to bill on our bill the wireless portion of the bill. But other than that, there are not a lot of costs other than just training costs for our employee base, so these are the costs we’ll incur there. As far as timing, we expect to begin selling the service in the next couple of months. We should roll it out and be of course expanding that over for the rest of the year. Regarding the proposed NPRM that the FCC released last week, really a poll of the national broadband plan. It prevents some opportunities and risk for CenturyLink and our rural customers of course. The NPRM is just a starting point. It's not an order, so there's much to be done within the industry to build overall consensus around reform. Obviously, the details and the matter in which the agency ultimately implements and reforms will be critical. We continue to support our approach that includes a reasonable transition period, minimal customer rate increases, no unfunded mandates. And we believe that we’re really, as a combined company with Qwest, we will be well positioned to manage to any of the reforms that may eventually be enacted. As you know, the NPRM proposes to reduce access charges over time. But it also proposes a stabilized of transition by harmonizing rates, reducing arbitrage, minimizing disputes. It also proposes to create an offsetting revenue opportunity, provide access to USS support where it's needed, and it converts USF support from the voice to high-speed data. So we expect a pretty consistent process here, and although certainly any time you see regulatory reform, you have some concerns, the process is starting out about as well as we could expect at this point.

Operator

Our next question comes from Frank Louthan. [Raymond James & Associates]

Frank Louthan - Raymond James & Associates

Can you give us comments on what the enterprise trends have been? What have you seen in some of your larger markets from a business perspective and the outlook for the year there? And with regards to the Verizon Wireless transaction, any deal there to lease some of your 700 megahertz spectrum? Or what are the thoughts on utilization of that asset?

Glen Post

As far as enterprise trends, we’re seeing businesses start to spend more. We're not seeing a lot of new startups in the smaller and midsized business area. But businesses are beginning to spend more. We hope that we’ll see that continue and expanded in the months ahead. Our outlook, by the way, does not include a real change in the economy. And one thing that we're doing is we believe positioning our company to really take advantage of opportunities as the economy changes there. But over time, with the Qwest acquisition, especially believe the enterprise is a real opportunity for us as far as future growth and establishing CenturyLink as really a nationwide enterprise company. As far as the Verizon anything there to utilize our 700 megahertz, there is not at this point. Of course, our 700 megahertz will represent with Qwest a very small percentage of our total footprint, but we will begin some trials later this year. We're going to be a fast baller to AT&T and Verizon on the 700-megahertz technology. It's still not where it needs to be as far as we're concerned anyway. But we'll be doing some trials there, and it is, obviously, a really attractive service. And it's a possibility that we could work with one of the other companies over time to build out and to share spectrum in some way. But that's a work in progress.

Operator

Our next question comes from Tim Horan. [Oppenheimer & Co.]

Timothy Horan - Oppenheimer & Co. Inc.

I'm sorry to focus on this again, but on the earnings front, the negative impacts from the primarily in your guidance coming from lower voice revenues and lower access revenues, I would assume they're going to build up throughout the year. I guess what I'm puzzled that is why would the earnings in the first quarter improve off of that first quarter run rate? I understand you’ll have the Qwest transaction, but is that the way that we should think about it, that this is kind of a good run rate that first quarter earnings for the rest of the year absent the Qwest transaction? Or should it even be declining off this first quarter number given the pressures that you're citing here?

Glen Post

So basically, the change that you'll see between first and second quarter and on should be lower because, again, what you're seeing in the first quarter is the initial step down in USF for the year. So that’ll be constant from now and for the other three quarters. And then also, the wireless carrier that's transitioning the traffic, as well as the company that's using our database, that revenue will probably trail off over the next couple of quarters or so.

Timothy Horan - Oppenheimer & Co. Inc.

So the pressure to earning should build up throughout the year, so the earnings, that $0.66 to $0.70 might be the peak earnings for the year, it should decline off of that run rate?

Glen Post

No. I mean, not necessarily. I mean, it really depends on the expense control later in the year, and it depends on the revenue, the reducing decline in revenue that we have projected in and expense control basically. The USF, that’ll pretty much be flat for the year from now and the same as it is for the fourth quarter.

Timothy Horan - Oppenheimer & Co. Inc.

On wireless front, how many years do you think it'll take to build out the most of the towers in your territory? And I guess are you concerned at all or having increased concerns on wireless cannibalization at this point? LTE speeds seem to be up around the 10 megabit kind of range, and I guess if you guys are essentially enabling that kind of rollout to the rural areas, what's to prevent that from cannibalizing the existing wireline broadband that you have out there now? And I guess related to that, maybe you can just give us an update where your average broadband speeds are now for wireline and kind of where you think that can go?

Glen Post

First of all, the build out within the next year and a half, we should have virtually the best of the geography of the build out complete so it’s not going to be ongoing [ph] forever. But mid-year next year, we should be pretty well, well with the vast majority. And really by the end of this year, the most of it, but within a year and a half have most of it done. With broadband substitution, LTE, we think there'll be some of that. We're not really concerned with that as much because just the demand on the carrier’s network for the wireless data growth, it’s their scene [ph]. I don't think they would want to pick up all the wireline data that's out there. I think customers are very satisfied with the wireline speeds they have. The pricing is competitive. So we don't have any real concerns on a broad scale but we'll see a lot of cannibalization by LTE in our networks. And our average speeds are about five meg, I think across the company, and that's kind of what we see on average as far as usage.

Operator

Our next question comes from Kevin Smith [ph[.

Unidentified Analyst

I noticed no cost savings in 2011 on the core business other than the Embarq synergies. Presumably, at 7% to 7.5% reduction in access lines, you’d be able to reduce headcount and other costs even without Qwest. Is this something we should be looking for in the Qwest merger synergies? Or am I missing something here?

Glen Post

Well, we don't want to talk about headcount, but I can tell you that we realized that costs in a business as usual basis when you see an access revenues, USF revenues coming down, we have to match our costs with a revenue decline. So we are very cognizant of those requirements, and as we work through the Qwest transaction, the synergies there, we'll take the action required to really match our cost with where our revenue potentially is. We'll increase some investments and headcount in some areas. But at the same time, we'll reduce headcount and costs in areas where we're seeing reduced revenues. So that's always on our agenda here.

Unidentified Analyst

But you can't quantify today what those would be without Qwest, normal course, not headcount, just overall OpEx reductions to match the access lines? Because obviously, the last couple of years, even without Embarq, you've taken down your OpEx, at least ratably with your access line declines.

Glen Post

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

Operator

Our next question comes from Donna Jaegers.[D.A. Davidson]

Donna Jaegers - D.A. Davidson & Co.

Can you give us a little more color on first of all the IPTV cost per home, what it cost to rollout, just ballpark? And then, as I was reading through your reports and everything, but I'm not seeing IPTV net add numbers or subscriber numbers or satellite subscriber numbers. Can you give us that data as well?

R. Ewing

On the second question, we are just not giving out numbers because it's small and just from a competitive purposes primarily as we get larger here in the next few months, we'll start giving those numbers, but right now, we’ve decided not to disclose.

Donna Jaegers - D.A. Davidson & Co.

How about your satellite numbers?

R. Ewing

Yes, we can give you the satellite numbers. We are at about almost 15% penetration of our base in total. We added 40,000 during the quarter and ended the year at 628,000 total DBS subscribers.

Donna Jaegers - D.A. Davidson & Co.

And obviously, it's too early for IPTV. On your Verizon Wireless agreement, Qwest said earlier on the iPhone, they don't get it right away, that would be the same sort of agreement you would have, I guess, on getting the iPhone from Verizon Wireless?

Karen Puckett

Yes, this is Karen. We expect to have really access to all of the phones that Verizon offers, not only the iPhone, but the BlackBerry and Andro [ph], all those important elements, just not one phone but the array of phones that they offer.

Donna Jaegers - D.A. Davidson & Co.

Including the iPhone?

Karen Puckett

Yes.

Operator

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.

Glen Post

In closing, CenturyLink continues to build on our solid results we've achieved over the last year since closing the Embarq transaction. We achieved solid results in the fourth quarter 2010 as we continued to slow the year-over-year rate of access line loss and drive revenue growth from strategic products and services. Our local operating model, combined with our strong product portfolio and target marketing efforts, continued to be effective in driving results.

Also, our employees continued to do an outstanding job of serving our customers while simultaneously integrating Embarq operations into our company and preparing for the Qwest acquisition integration. Work on the Qwest transaction approval process and planning for the Qwest integration are going well, and I'm very confident in our company's ability to execute our business plan in the months ahead.

Thank you for participating in our call today. And we look forward to speaking with you again in the near future.

Operator

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.

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