I'd like towelcome everyone to the Qwest third quarter 2007 earnings conference call. (OperatorInstructions) I would now like to turn the call over to Mr. Rahn Porter.
Hello everyone andwelcome to our call. We're here to discuss our third quarter results. With uson the call this morning are Ed Mueller, our Chairman and CEO, and JohnRichardson, our Executive Vice President of Finance and CFO.
Before I turn thecall over to Ed I'd like to remind everyone that we will be makingforward-looking statements. These statements contain risks and uncertainties,which could cause actual results to differ materially from those expressed orimplied here on the call. Those risks and uncertainties are on file with theSEC.
Additionally, wedo not adopt analyst estimates nor do we necessarily commit to updating theforward-looking statements that we make here. Also let me mention that in orderto supplement the reporting of Qwest consolidated financial information thecompany will discuss certain non-GAAP financial measures including EBITDA, freecash flow and net debt.
A full reconciliationof non-GAAP measures is included in the quarterly earnings section of ourwebsite.
With that I'd liketo turn the call over to Ed.
Good morning.Thank you for joining us. I would like to begin by giving you my perspective onour third quarter results as well as updating you on our strategic review. I'msure you've already reviewed our earnings release and what we have disclosedabout this quarter. John will go into greater detail on this shortly.
In ourmass-markets channel the trends of declining access lines, growth in broadbandconnections, growing video subscribers with our partner DIRECTV, ARPU increasesand higher bundle penetration are consistent with our prior quarters.
Our businesschannel continues to transition from legacy products to our strategic dataproducts. As you recall, we invested in more than 200 additional salesassociates over the past year. We have not yet realized their full potential,but are encouraged by the growing results in our sales funnel.
We remain confidentthat this investment, along with our ability to sell into our networkscontract, will result in a growing business channel. On the wholesale front,we've experienced the impact of industry consolidation along with some onetimeitems. While further industry consolidation activity is possible, we’re focusedon profitability replacement with our higher margin data products. Wirelessrevenues continue to expand as we complement our bundles and reduce churn. Johnwill provide much more detail in his remarks.
Let me now move toour strategic assessment. As you have read in our press release, we have twolarge onetime items this quarter; both are good news for our company. The firstitem relates to our successful settlement of our remaining opt-out shareholderlitigation. Putting this uncertainty behind us is a significant milestone forQwest.
The second item isa $2.1 billion tax benefit recognizing the value of our tax assets. Mostimportantly this indicates our confidence in sustainable profitability, key toour strategic initiatives. As we look to the future we're convinced thatincreased bandwidth to our customers is critical for long-term success. We'rehappy to announce that our Board has approved the expansion of our “fiber tothe node” plan.
We will set asideup to $300 million next year for this effort. We believe that this will enableus to serve around 1.5 million additional homes with speeds of 20 MB persecond. With pair bonding to the home we believe it may be possible to doublethat speed. We're developing our marketing plans to coincide with this newcapability.
We're stillplanning to finish the remainder of our strategic review process by the end ofthe year. In that light our Board has agreed to defer any future shareholderreturn decisions. This is a prudent course to follow.
I will now turnthe call over to John for more details on our third quarter 2007 financialresults.
Thanks Ed, andgood morning everyone. Our third quarter results were underscored by many ofthe same favorable trends in the consumer and business markets we've discussedthroughout the year. Adjusted EBITDA margin improved both sequentially andcompared to the prior year and adjusted free cash flow is on track with ourprevious expectations.
Let me review themost significant results from the quarter beginning with revenue. Revenuetotaled $3.4 billion in the quarter with continued strength in data andInternet products in all channels. Total revenue was down modestly from theprior quarter and the prior year results.
This wasprincipally due to our wholesale channel while growth in consumer and businessstrategic products offset and in some cases outpaced the impact of competitionand changes in the industry.
In the mass-marketschannel revenue grew again on a year-over-year basis. Subscriber adds reboundedfrom the seasonally weak second quarter with video and broadband subscribersboth contributing to net connections.
Consumer ARPUagain grew this quarter to over $55 from $53 in the second quarter and $50 inthe third quarter a year ago. Access lines showed the effect of technologysubstitution and competitors in our territory. The absolute number of accesslines lost sequentially in the quarter was at our lowest level since the firstquarter of 2006.
However, the rateof loss compared to the prior year was slightly worse at 7.2%. We believe thatthe trends in access lines, broadband and video subscribers have been affectedby certain consumer market pressures including housing starts. We have noted amarked decrease in the number of calls received for new and relocatingcustomers in 2007, atrend that has been observed by our peers and competitors as well.
Despite thesefactors we continue to see improvement in key indicators. Our bundlepenetration increased to 61% from 56% a year ago. Consumer ARPU, as previouslymentioned, increased 10% from the prior year. Video penetration of our primaryaccess lines increased to 9% from 4.7% a year ago, and broadband passed the 2.5million subscriber mark, an improvement of 28% over the prior year.
Again this quarterthe 10% growth in consumer ARPU exceeded the 7% decline in access linessupporting a 1.5% year-over-year expansion in mass markets revenue. We seeopportunity for these trends in ARPU and bundle growth to continue.
We expectcustomers to appreciate the quality of our service and the value proposition ofbundling as they consolidate all their communication and video services withus. We expect mass-markets revenue growth this year recognizing that economicfactors could pressure revenues in the fourth quarter.
Qwest's businesschannel continues to experience strong momentum of underlying trends in keygrowth products; business products such as iQ, Metro Ethernet and Voice-Over-IPall show double-digit sequential growth.
We see significantgrowth in the sale of advanced technology services in the business channel,which have now translated to growth in provisioning and have begun to bereflected in revenue. Revenues grew 1% sequentially and were down slightlycompared to the prior year with sequential growth in revenue from IP-basedproducts outpacing declines in traditional ATM and Frame Relay.
Hosting revenuegrew more than 14% compared to the prior year driven by increased demand forrack space and increased levels of many services sold in our CyberCenters.Qwest recently opened our second new CyberCenter in 2007. In connection with the openingof this Center in Denver, Coloradowe signed Fox Interactive Media as a significant anchor customer.
This CyberCenteropening is an example of our responsible approach to investing in near-termgrowth opportunities and where customer demand is strong. The expansion of the CyberCenterfootprint and the increased take rates of higher margin services should supportadditional revenue and margin improvement.
Strategic dataproducts now represent more than 24% of the total business channel revenue withstrategic product revenue up 8% sequentially and more than 20% from a year ago.Our third and fourth-quarter cash flows are being positively impacted bysubstantial cash payments from a contract received for services by the businesschannel, which we've provided over several years.
Based on the termsof the services sold, revenues and expense will not be significantly impactedin 2007 by this transaction, but will be reported over the contract life. We'vereceived our first task order award by an individual federal agency under theNetworx program. This is a key step in this process, but, as we previouslynoted, the revenue impacts from Networx contracts are not expected to impactour results until 2008.
All of thesefavorable trends, including the potential from Networx, support an opportunityfor expanded growth of our business channel in future periods.
Our quarterlywholesale channel revenue declined 4% sequentially and 8% on a year-over-yearbasis. These declines were led by long distance and local access products. Wesaw a continued loss of volume to carrier consolidation as well as the impactof some customer settlements and onetime items.
We do not expectthese isolated customer events to repeat in the fourth quarter; rather we arefocused on replacing revenue lost to carrier consolidation with more profitablereseller and data traffic over time.
Wireless revenuegrew 3% sequentially and 7% compared to the prior year due to the increasedsubscriber levels and onetime revenue recognized related to handsets. Wirelesssegment income was slightly positive for the third consecutive quarter as ourMVNO product continues to pay for itself while complementing our bundle andreducing churn. Due to the lag in replacing carrier revenue and other factorswe now expect our 2007 total company revenues to be slightly down from 2006 levels.
Let me now shiftto the rest of the income statement. Adjusted EBITDA margin in the quarterimproved 30 basis points sequentially and 100 basis points year-over-year to33.5%. We booked a significant charge in the quarter related to resolving shareholderlitigation with parties who opted out of our original settlement last year.
We have excludedthe impact of these and other litigation matters in reporting adjusted EBITDAmargins consistent with our past practice. We are pleased to have resolved theopt-out litigation and not only eliminate the overhang of uncertainty fromthis, but also avoid the significant ongoing legal costs that would haveresulted from continuing to litigate these cases.
Adjusted EBITDA of$1.15 billion for the quarter represents a $17 million improvement from theprior year and is comparable to the second quarter. With three quarters behindus we now believe that the 2007 adjusted EBITDA will improve in the range of$250 million from full-year 2006 levels.
Our initiativescontinue to deliver savings and facilities and employee-related costs thisyear, however a slower than anticipated ramp in business and wholesale revenuesand the economic impacts on the mass markets channel have kept us fromcapturing our full 2007 EBITDA opportunity.
That said, withbetter-than-expected results in managing other cash impacting items we stillexpect to deliver up to $400 million improvement of adjusted free cash flow in2007. We did generate solid seasonal adjusted free cash flow of $333 million inthe quarter. The third quarter adjusted free cash flow declined sequentiallyreflecting normal seasonal cash disbursements.
Year-to-date freecash flow of $1.2 billion is $359 million ahead of where we were last year.This improvement is due to a combination of better operating results; loweryear-to-date capital expenditures and improved management of the balance sheetincluding accounts receivable and payables. As previously indicated, we are ona path toward our goal of up to $1.8 billion in adjusted free cash flow for theyear.
We continue toinvest in our business in a responsible manner in order to drive lower cost andincreased revenue opportunity. Capital expenditures for the quarter were flatsequentially at $420 million. We believe that the slowing economy and relatedslowdown in real estate development has impacted our need for capital in thisarea. Year-to-date capital expenditures of $1.2 billion are about 5% below 2006levels.
As Ed noted, ourBoard of Directors recently authorized increased capital spending directed atour deployment of “fiber to the node.” As we continue our plan of increasingthe speed and capability of our network in a targeted way, we still expect our2007 capital expenditures to be in the range of 2006 levels.
For the quartercost of goods sold declined 30% to 38% of revenue from 40% a year ago,supported by reductions in facilities and employee-related costs. Volumedeclines were the leading reason for the facility cost reductions, but ourinitiatives for cost reductions continue to accumulate results with opportunityfor further improvements.
Our employee countis down 5.5% or more than 2,000 employees from this time last year, largelythrough attrition, while productivity and customer service measures improve.
Selling, generaland administrative expense includes the $353 million legal charge, again,primarily related to our settlements with parties who originally opted out ofour shareholder litigation settlement last year. Excluding these charges,quarterly expenses would have declined 4% from the prior year, largely as aresult of lower employee related costs.
Net income in thequarter was $2.1 billion or diluted earnings per share of $1.08 and was drivenin large part by our reversal of the previous allowance against our deferredtax assets. While this reversal does not change the fact that we will not paysignificant cash income taxes in the near future, we now expect to beginshowing book taxes on our statement of operations beginning in the firstquarter of 2008.
While the reversalhas no immediate effect on our cash flow, it does reflect confidence in ourability to generate operating profits in the future. As such I consider it tobe another significant milestone passed for Qwest. Excluding the effect of thetax benefits and the previously mentioned legal charges, earnings would havebeen $269 million or $0.14 per diluted share.
Finally, wecontinue to improve the profile of our balance sheet. With the reversal of thetax valuation allowance in the quarter, we now have a positive equity positionfor the first time since the first quarter of 2002. We maintained a strongliquidity position with cash and cash equivalents of $1.1 billion whilecontinuing to make good progress on our share buyback program.
Through September30th we have executed on 58% of the $2 billion two-year program and are 62%complete as of today. We expect to be opportunistic in continuing to reduce ourleverage, most likely as debt comes due and when circumstances make such anactivity value created.
In fact, since thequarter end we have paid off an additional $250 million in high coupon debt,continuing to reduce future interest expense. We will enhance our financialflexibility including simplifying our capital structure and retaining a manageablematurity profile.
In summary, we aremaintaining momentum in our key growth products, driving higher ARPU andimproved free cash flow. We are investing our capital and expense dollars inareas where we see the best opportunity for returns and are continuing toimprove the competitive cost structure of our business.
With that let meturn the call back to Ed.
Thank you, John. Ican ensure that as we complete our strategic review, identifying theopportunities for future value creation, Qwest will continue to focus on itsoperations day in and day out. We will take advantage of opportunities forrevenue growth and employ cost and capital discipline to drive margin and freecash flow improvement.
Our leadership atQwest knows that this ongoing day-to-day blocking and tackling under our planis essential to success and is what you have been accustomed to see from us.Let me assure you that under my leadership, we will execute responsibly andwith the discipline that you've come to expect as we move forward through therest of this year and into the future.
With that we'll beglad to take your questions.
(OperatorInstructions) Your first question comes from John Hodulik with UBS.
John Hodulik -UBS
Thanks. Goodmorning. Just a couple of quick questions on the fiber to the node plan. Ithink, either Ed or John, you mentioned an additional 1.5 million homes addedwith the $300 million spend. It just seems to suggest that you have some “fiberto the node” in the network now in the number of homes hooked up already? Couldyou sort of discuss that?
And then I think,you have about somewhere between 10 million and 12 million total homes in yourregion. What's the plan going forward? Obviously this is a fairly smallpercentage of the total, where do you expect to eventually get to and over whattime period?
Just a quickcorollary to that, at this point is the plan just to sell higher data services,speed services and try to boost ARPU in the face of slowing net adds? Or arethere other services like video that you believe that you'll eventually beoffering, services on top of as well?
And then lastlywith the CapEx. I heard you say it should stay about $1.6 billion, but based onspending in '07 it looks like about $800 million, or half as you say in therelease, is going towards broadband now leaving only about $800 million inmaintenance capital. It would seem to suggest that you expect to be able to cutthat by about $300 million and I'm just wondering sort of what are the areasthere? Is it economic driven or are there other areas you can cut?
I'll take thefirst part and then John can talk about the CapEx that we've provided for you. Fiberto the node is almost exactly what you said here. We are investing fiber to thenode, so we have multiple homes passed today that have various speedsassociated with it.
Ourgoal is to solidify and say to the market as well as to our customers that weare going to bring 20 MB of speed to your home. We are not having a new videostrategy; we're staying with DIRECTV. We will take advantage of any products orservices that will come over higher speed, even maybe backhaul opportunities.
So that's what ourfiber to the node strategy is. We're spending somewhere probably between $70million and $100 million this year on “fiber to the node.” So if you took 100just at the top end here we're incrementing $200 million. We really believethis is the responsible way to get our bandwidth to our customers and therewill be multiple services that will come over that.
So that's ourthinking here. I think it's a very responsible way to do it. We will be planningmarketing programs and testing along the way of all the fiber we have out thereor even the copper that will serve closer in. And we will then adjust our plangoing forward. On the CapEx spend, I'll turn that over to John.
Sure, John. Goodmorning. As we've indicated in the press release in the past, we spend asignificant amount of our capital budget on putting higher speeds into thenetwork. And this year it's over half of our capital spend. And as Ed hasindicated, about $70 million to $100 million of that is driven by our specific “fiberto the node” strategies.
Going forward, Ithink it's probably look premature to talk about how that mix might change. Wehaven't completed our budgeting process for 2008, but that being said, clearlyas we are moving from our traditional telephone type business to a data and IPworld, increasingly we'll be focusing our capital expenditures on improvingspeeds into our network.
Your next questioncomes from the line of Jonathan Chaplin with J. P. Morgan.
JonathanChaplin - J. P. Morgan
Good morning. If Icould just follow-up on the last question. I think, Ed, you said you're lookingat this as a $200 million incremental spend on fiber to the node. So should wethink of that as $200 million in incremental CapEx for 2008 in total, so that putting CapExsomewhere between $1.8 billion and $1.9 billion for 2008?
And then followingup from that, given that broadband growth is really beginning to slow for you Ithink broadband net add sell looked a little light this quarter. How do youthink about getting a return on this invested capital that you are pouring intobroadband? If you're not doing video, what are you getting incrementally forall of spend?
And then finally,I think the outgoing management team hinted fairly strongly that a dividend wason the way. And we obviously didn't get a dividend at the last Boardannouncement and then we hear today that the CapEx is going to be potentiallyhigher next year. How should we relate those two data points? Is part of what'sdriving your decision not to pay a dividend your outlook that capital spendinghas to go up next year? Thank you.
Good morning,Jonathan. Those are expected questions, thank you very much. The incremental$200 million, we have not finished our CapEx for 2008 and we're not guiding tothat. So when we get to that, we will. And we will do our entire CapEx planbased on our 2008 strategic review and where we had.
I would say to youthat the return model, it's our belief that there will be plenty of productsand services that will flow over high-speed bandwidth. So to have it pinneddown to one or the other we really believe that this is a prudent spend so wewouldn't share our return factors on that. We think it will be the right thingto do actually for our investors, shareholders, employees going forward and ourcustomers.
On the dividend,we're not going to say anymore. We're completing our strategic review, so whenwe get done with our strategic review our whole shareholder return strategy,which would have a piece of dividend potentially or maybe not, and would haveour debt and as far as our investments how we would see that. It's prematureand we think that a shareholder return strategy follows our strategic reviewand we will have that later.
JonathanChaplin - J. P. Morgan
Ed, if I couldjust follow up on that. One of the hallmarks of the Dick Notebaert era that Ithink investors really liked was his insistence that if an incremental dollarof CapEx was going to go into the ground he'd have to be able to demonstrate toinvestors in a very clear way exactly how the return on that investment wasgoing to be realized.
So it definitelymakes me a little nervous that there is an expectation that there will be justin a very general sense new products and services that will help generate areturn on this invested capital, as opposed to a very clear and preciseperspective of exactly how the return is going to be realized. Thank you.
Your next questioncomes from the line of Simon Flannery with Morgan Stanley.
Simon Flannery- Morgan Stanley
Good morning. Ed,I wanted to get your perspective after your first couple of months with Qwest.You've been in the telecom industry a long time but you took a few years away;you went to the retail industry.
What's beeninteresting to you, surprising to you about the lessons from the retailindustry that you think you could apply to the telecom sector in terms ofcompeting more aggressively versus monopoly type industry a few years ago?
And one thing wehaven't really talked about today is mergers and acquisitions. Is that apotential or is that really off the table as far as you're concerned? Thanks.
Good morning,Simon. On the retail side, I would say that the best experience you get thereis the speed to market and how fast you have to respond because you start with$0 in the cash register every day.
And when you'redesigning your own products and services, as we did at Williams Sonoma, youwere forced to really view it through the customers' eyes. You couldn't juststart from what you wanted somebody to have, and that does go back on the fiberto the node build. We have to be ready to have speed. And Jonathan, to yourpoint, we will be disciplined, but I can't give you all the products andservices today that would be put on there and I think it would be crazy tothink I knew them all.
We have a goodstrategy and we know our network has to be able to carry that. And that's whatI learned in retail. So to that degree that's where we are. Now help me withthe second part of your question.
Simon Flannery- Morgan Stanley
Yes, thank you.M&A obviously is looked at in your strategic plan and that's part ofbuilding shareholder wealth. That's one reason we are wanting to complete ourstrategic plan. And I want to review all the activity that's either been doneor could be possible in front of us and get that done sooner than later so weknow how to go forward. And so that would be part of a strategic reviewdefinitely.
Simon Flannery- Morgan Stanley
And are youplanning to have this done by year-end?
Your next questioncomes from the line of Chris Larsen with Credit Suisse.
Chris Larsen -Credit Suisse
Actually, first isa clarification from John. The $2 billion that you're recognizing today in theNOL, the tax benefit, is that in addition to the 4Q recognition on FIN 48 or isthat just the GAAP recognition of the FIN 48?
And then secondly,in the wholesale area where you're seeing a little bit of the customers comeup, can you give us an idea of the size of the onetime settlements or theimpact there? And then the other weakness is that volume, is it a price issue,is it a combination of the two or is one that’s changing more rapidly than the otheron volume versus price? Thanks.
Sure Chris. Firstof all, I think on the tax benefits you have to try to kind of delink the FIN48 accounting and the recognition of the valuation allowance on deferred taxassets. They were two distinct accounting treatments; the FIN 48 stuff wasrecognizing tax benefits that we would be able to more likely than not receiveand the recognition of the valuation allowance on deferred tax assets is thatwe have confidence in our earnings stream going forward and we could utilizethe NOLs.
As it relates tothe wholesale side, as we mentioned the onetime settlements were in the accessside of our business, actually it's kind of a perfect storm type thing. We hada benefit in the second quarter and a hurt in the third quarter that were aboutequal size. So those two items together were the principal reason for the dropin our access revenues.
And lastly, as itrelates to the wholesale, we have experienced losses from industry consolidationall through the year. I think that going forward our goal here is to continueto replace that lost revenue with higher map margin reseller and data and IPrevenue, and obviously to date we have not been able to completely replace it. Ourgoal is to continue to strive to try to replace that in the future, Chris.
Chris Larsen -Credit Suisse
And John, if Icould just clarify one more thing on the NOLs, that's really helpful. I have justunder $7.5 billion of NOLs left and that would get you through about, againdepending on how well things go between now and then, through about 2010without paying taxes, is that right?
Our NOLs are, Ithink into 10-Q we indicate that there are $7.2 billion and I don't think it'sup to me to try to project for when we'll utilize them.
Your next questioncomes from the line of David Barden with Banc of America.
David Barden -Banc of America
Good morning. Iguess two questions; first, just as the stock is flirting with a 52-week lowhere at the open. It reflects obviously a greater level of uncertainty aboutwhere the business is going then than there's probably been in a year, evenwhen there wasn't a CEO here.
And it seems to bein part driven by the fact that there's the strategic review, which is kind ofcoming at the end of the year, but I think a big part of the sense in themarket is that you're the only new guy there and that all the people that kindof were part of the business and the decisions are in place.
And I guess,there's a question of what are you attempting to bring to the table that's sosignificant, that it's worth kind of taking this six month period to kind ofnot talk to the market and go into a review mode and really reassess everythingthat the business is doing.
It createsuncertainty and any kind of interim review you could give us now, beyondspending $200 incremental million on fiber would be pretty helpful I think forpeople because as you appreciate there's a real concern that the lack of adividend and potential investments in fiber could amount to a total unwindingof the cash flow story that Qwest used to be.
So I think that'sthe fear in the market and if you could talk to that that would be reallyhelpful. And I think second would be just on the litigation payments, John,could you talk about the payment schedule for that? I know the originalsettlement had multiple payments, when is this 350 going to come due? Thanks alot.
Okay, David, I'lltake that. I appreciate what you said; that's kind of the theme of thequestions. Jonathan was on the same thing. Yes, I am the only new guy here, Iguess that's true.
We were at aplateau here where we were moving and the prior periods got us in betterposition with our free cash flow, we're not doing anything going forward otherthan announcing the $200 million “fiber to the node” that really is anydifferent than we've been doing before.
I get theuncertainty, I appreciate that, but I think I'd rather live with uncertaintyand then give a strategic review time to go. I mean, I think it's reasonable tothink that coming in late of August and having a strategic review of where weare by the end of the year is prudent.
I get that there'suncertainty. I don't think that the “fiber to the node” announcement really isany different than we've been doing other than we've escalated it a bit. Wehave invested $70 million to $100 million this year. We squeezed our capitalprogram to put into the new products and services; we are not abandoning theNetworx products.
So I think overallwe're not really executing any different than we did before. I get that thecloud’s over there, I understand that, we're willing to put up with that. Ithink we will continue to give news as we get it.
I mean you couldsay just hold all your decisions to the end, but we know we want to get goingin our network. So, under my direction, as we learn something we give it to themarket, that's what I like to do and I don't like to hold it until some biggerplan; life doesn't work that way.
You have to goalong as you go, and I want to give it to you earlier than later, and if that'scausing uncertainty we will deal with that, I will tell you straight up whatwe're trying to do and we will continue that way over time.
So that's the bestI can do. I get the uncertainty, but I think this is a prudent way to run thebusiness. We have a good management team here; we're not going off and doingsomething crazy, I'm not sending them in different directions. I think they'veexecuted well, I think the beauty of where this company is, it has establishedfree cash flow and the certainty of the free cash flow is being acknowledged.
I think theopt-out litigation is a good thing. I think the ability to reverse our NOLs isan incredibly powerful signal that people besides us think this company willmake money, and we'll be in a great position. So I hope that helps you.
David Barden -Banc of America
Well Ed, if Icould maybe just one more follow-up on that would be at this point in thereview, started in August, now we're in October, presumably directionallyspeaking you've got a sense as to whether this company was kind of a modestgrowth cash flow focused story that had gotten its balance sheet in order andwas looking to reward equity holders with the cash flow at the margin. Is therereason to believe that under the Ed Mueller regime that story is going toradically change?
I don't know.Until I finish my strategic review my goal here is to build shareholder returnthrough whatever means we can do that. I wasn't here under the model you talkedabout or how that was put out.
I think it'spremature to expect that while I'm going through the strategic review that wewould have limited it to one or two elements of the shareholder return to ourpeople. So I guess there's more to come, David. I'd like to tell you more, butI'm not inclined personally to tell things I don't know.
David Barden -Banc of America
I appreciate it,Ed. John, on the litigation payments?
When the Q comesup later today and I have our disclosures around the litigation and I wouldrefer you to that. As it relates to the timing of the payments, it's not ourintention to make disclosure about that.
Your next questioncomes from the line of Frank Louthan with Raymond James.
Frank Louthan -Raymond James
Good morning. Onthe buyback, just a quick question there. It did not make a whole lot ofprogress here. Is there a change of opinion here on the buyback or was thereanything going on looking at M&A or something that would have precluded youfrom being in the market? Your stock was down during the quarter; it seemedlike an opportunity to exercise on the buyback.
And then on thecarrier side on the wholesale revenue, can you give us a little more color onexactly where this is running off? Is this some of the BellSouth revenue thatyou've been generating in the past that maybe is falling off a little bitfaster? And is this kind of the first shoe here, or are there going to be morecarrier slips for several quarters, I mean a more prolonged thing? We'vealready seen most of the declines in the carrier revenue here? Thanks.
Frank, first ofall, on the share buyback program, we continue to execute up against thatprogram through today. We've executed 62% of the program. I think that's over$1.2 billion. We're ahead of schedule on this two-year buyback program, sowe've continued to march there. It's our intention to complete that programwithin the two-year time frame.
As it relates tothe wholesale revenue, our challenge here is that not only do we have someconsolidating effects this quarter, but as the industry continues toconsolidate, I think that it's inevitable that we'll just have some additionallosses due to the industry consolidation.
But our goal hereis to be able to replace that revenue with higher margin rebiller revenue ordata and IP revenue, and I think that's where we've really just fallen behind abit here. In the future it's our goal to do that. And Roland Thornton and histeam are dedicated to that and are working day in and day out to make thathappen.
Okay, we have timefor one more question.
Your next questioncomes from the line of Michael Rollins with Citigroup.
Michael Rollins- Citigroup
Hi, good morning.Just wanted to ask a little bit more about the change in the OIBDA guidance. Ifyou could sort of look at the $400 million from before hand in terms of theyear-over-year increase and now at $250 million. Is all of it revenue shortfallfrom the expectations and then just taking a margin off that revenue? Or werethere costs and investments that you're making in addition that are dilutingthat cash flow?
And then secondly,and this is related, you mentioned about industry consolidation affecting thewholesale business. Now a lot of the deals that have been announced are done,but there's still integration that's ongoing from those transactions, and ifyou could talk about the potential headwinds you see heading into 2008 fromsome of the after affects of that integration? Thanks.
There's a lot ofups and downs, but I mean in large part it's revenue related. We thought thatwe were going to grow our revenues slightly driven by improved revenue trendsin the second half of the year, and now we see our revenue decreasing slightly.So I think you can do the math. Our gross margin sales less cost of sales arearound 60%, so this is largely a revenue related issue for us.
As it relates towholesale, I think what I've indicated here in the last few comments aroundwholesale, I really don't have much more to add to it. We've had theconsolidation, there very well could be further consolidating effects, and wehave to get to it here and be able to drive revenue growth in other areas.
Let me justconclude. I understand the frustration that you're putting out here. I get thatyou'd like us to or me personally to give you more answers and I'm holdinguntil the end of the year.
I appreciate yourpatience. I do think this is the right way to go. I think these few months thatwe're going to take this in we're executing our business 99% of the way we'vealways done it, so I know there will be a little impatience, I understand thefrustration. But I think a complete holistic plan from a new CEO is the rightthing to do, and personally it makes me feel like we will give the bestshareholder returns by taking this little breather in how I'm looking at thebusiness.
So with that Ihope you stay with us. We're going to produce; we're going to have a greatcompany. The company will take what's been accomplished in the last four orfive years, which has been enormous, and we're going to make the best of it.
So with that, Iknow there are lots of calls going on further today, but we will terminate thisconference call.
This concludestoday's Qwest third quarter 2007 earnings investment community conference call.
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