Rahn Porter – Senior Vice President, Investor Relations
Ed Mueller - Chairman and Chief Executive Officer
John Richardson - Chief Financial Officer
John Hodulik - UBS
Jonathan Chaplin - J.P. Morgan
Simon Flannery - Morgan Stanley
Chris Larsen - Credit Suisse
David Barden - Banc of America
Frank Louthan - Raymond James
Michael Rollins - Citigroup
Qwest Communications International, Inc (Q) Q3 2007 Earnings Call October 30, 2007 9:00 AM ET
I'd like to welcome everyone to the Qwest third quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Rahn Porter.
Hello everyone and welcome to our call. We're here to discuss our third quarter results. With us on the call this morning are Ed Mueller, our Chairman and CEO, and John Richardson, our Executive Vice President of Finance and CFO.
Before I turn the call over to Ed I'd like to remind everyone that we will be making forward-looking statements. These statements contain risks and uncertainties, which could cause actual results to differ materially from those expressed or implied here on the call. Those risks and uncertainties are on file with the SEC.
Additionally, we do not adopt analyst estimates nor do we necessarily commit to updating the forward-looking statements that we make here. Also let me mention that in order to supplement the reporting of Qwest consolidated financial information the company will discuss certain non-GAAP financial measures including EBITDA, free cash flow and net debt.
A full reconciliation of non-GAAP measures is included in the quarterly earnings section of our website.
With that I'd like to turn the call over to Ed.
Good morning. Thank you for joining us. I would like to begin by giving you my perspective on our third quarter results as well as updating you on our strategic review. I'm sure you've already reviewed our earnings release and what we have disclosed about this quarter. John will go into greater detail on this shortly.
In our mass-markets channel the trends of declining access lines, growth in broadband connections, growing video subscribers with our partner DIRECTV, ARPU increases and higher bundle penetration are consistent with our prior quarters.
Our business channel continues to transition from legacy products to our strategic data products. As you recall, we invested in more than 200 additional sales associates 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 confident that this investment, along with our ability to sell into our networks contract, will result in a growing business channel. On the wholesale front, we've experienced the impact of industry consolidation along with some onetime items. While further industry consolidation activity is possible, we’re focused on profitability replacement with our higher margin data products. Wireless revenues continue to expand as we complement our bundles and reduce churn. John will provide much more detail in his remarks.
Let me now move to our strategic assessment. As you have read in our press release, we have two large onetime items this quarter; both are good news for our company. The first item relates to our successful settlement of our remaining opt-out shareholder litigation. Putting this uncertainty behind us is a significant milestone for Qwest.
The second item is a $2.1 billion tax benefit recognizing the value of our tax assets. Most importantly this indicates our confidence in sustainable profitability, key to our strategic initiatives. As we look to the future we're convinced that increased bandwidth to our customers is critical for long-term success. We're happy to announce that our Board has approved the expansion of our “fiber to the node” plan.
We will set aside up to $300 million next year for this effort. We believe that this will enable us to serve around 1.5 million additional homes with speeds of 20 MB per second. With pair bonding to the home we believe it may be possible to double that speed. We're developing our marketing plans to coincide with this new capability.
We're still planning to finish the remainder of our strategic review process by the end of the year. In that light our Board has agreed to defer any future shareholder return decisions. This is a prudent course to follow.
I will now turn the call over to John for more details on our third quarter 2007 financial results.
Thanks Ed, and good morning everyone. Our third quarter results were underscored by many of the same favorable trends in the consumer and business markets we've discussed throughout the year. Adjusted EBITDA margin improved both sequentially and compared to the prior year and adjusted free cash flow is on track with our previous expectations.
Let me review the most significant results from the quarter beginning with revenue. Revenue totaled $3.4 billion in the quarter with continued strength in data and Internet products in all channels. Total revenue was down modestly from the prior quarter and the prior year results.
This was principally due to our wholesale channel while growth in consumer and business strategic products offset and in some cases outpaced the impact of competition and changes in the industry.
In the mass-markets channel revenue grew again on a year-over-year basis. Subscriber adds rebounded from the seasonally weak second quarter with video and broadband subscribers both contributing to net connections.
Consumer ARPU again grew this quarter to over $55 from $53 in the second quarter and $50 in the third quarter a year ago. Access lines showed the effect of technology substitution and competitors in our territory. The absolute number of access lines lost sequentially in the quarter was at our lowest level since the first quarter of 2006.
However, the rate of loss compared to the prior year was slightly worse at 7.2%. We believe that the trends in access lines, broadband and video subscribers have been affected by certain consumer market pressures including housing starts. We have noted a marked decrease in the number of calls received for new and relocating customers in 2007, a trend that has been observed by our peers and competitors as well.
Despite these factors we continue to see improvement in key indicators. Our bundle penetration increased to 61% from 56% a year ago. Consumer ARPU, as previously mentioned, increased 10% from the prior year. Video penetration of our primary access lines increased to 9% from 4.7% a year ago, and broadband passed the 2.5 million subscriber mark, an improvement of 28% over the prior year.
Again this quarter the 10% growth in consumer ARPU exceeded the 7% decline in access lines supporting a 1.5% year-over-year expansion in mass markets revenue. We see opportunity for these trends in ARPU and bundle growth to continue.
We expect customers to appreciate the quality of our service and the value proposition of bundling as they consolidate all their communication and video services with us. We expect mass-markets revenue growth this year recognizing that economic factors could pressure revenues in the fourth quarter.
Qwest's business channel continues to experience strong momentum of underlying trends in key growth products; business products such as iQ, Metro Ethernet and Voice-Over-IP all show double-digit sequential growth.
We see significant growth in the sale of advanced technology services in the business channel, which have now translated to growth in provisioning and have begun to be reflected in revenue. Revenues grew 1% sequentially and were down slightly compared to the prior year with sequential growth in revenue from IP-based products outpacing declines in traditional ATM and Frame Relay.
Hosting revenue grew more than 14% compared to the prior year driven by increased demand for rack space and increased levels of many services sold in our CyberCenters. Qwest recently opened our second new CyberCenter in 2007. In connection with the opening of this Center in Denver, Colorado we signed Fox Interactive Media as a significant anchor customer.
This CyberCenter opening is an example of our responsible approach to investing in near-term growth opportunities and where customer demand is strong. The expansion of the CyberCenter footprint and the increased take rates of higher margin services should support additional revenue and margin improvement.
Strategic data products now represent more than 24% of the total business channel revenue with strategic product revenue up 8% sequentially and more than 20% from a year ago. Our third and fourth-quarter cash flows are being positively impacted by substantial cash payments from a contract received for services by the business channel, which we've provided over several years.
Based on the terms of the services sold, revenues and expense will not be significantly impacted in 2007 by this transaction, but will be reported over the contract life. We've received our first task order award by an individual federal agency under the Networx program. This is a key step in this process, but, as we previously noted, the revenue impacts from Networx contracts are not expected to impact our results until 2008.
All of these favorable trends, including the potential from Networx, support an opportunity for expanded growth of our business channel in future periods.
Our quarterly wholesale channel revenue declined 4% sequentially and 8% on a year-over-year basis. These declines were led by long distance and local access products. We saw a continued loss of volume to carrier consolidation as well as the impact of some customer settlements and onetime items.
We do not expect these isolated customer events to repeat in the fourth quarter; rather we are focused on replacing revenue lost to carrier consolidation with more profitable reseller and data traffic over time.
Wireless revenue grew 3% sequentially and 7% compared to the prior year due to the increased subscriber levels and onetime revenue recognized related to handsets. Wireless segment income was slightly positive for the third consecutive quarter as our MVNO product continues to pay for itself while complementing our bundle and reducing churn. Due to the lag in replacing carrier revenue and other factors we now expect our 2007 total company revenues to be slightly down from 2006 levels.
Let me now shift to the rest of the income statement. Adjusted EBITDA margin in the quarter improved 30 basis points sequentially and 100 basis points year-over-year to 33.5%. We booked a significant charge in the quarter related to resolving shareholder litigation with parties who opted out of our original settlement last year.
We have excluded the impact of these and other litigation matters in reporting adjusted EBITDA margins consistent with our past practice. We are pleased to have resolved the opt-out litigation and not only eliminate the overhang of uncertainty from this, but also avoid the significant ongoing legal costs that would have resulted from continuing to litigate these cases.
Adjusted EBITDA of $1.15 billion for the quarter represents a $17 million improvement from the prior year and is comparable to the second quarter. With three quarters behind us we now believe that the 2007 adjusted EBITDA will improve in the range of $250 million from full-year 2006 levels.
Our initiatives continue to deliver savings and facilities and employee-related costs this year, however a slower than anticipated ramp in business and wholesale revenues and the economic impacts on the mass markets channel have kept us from capturing our full 2007 EBITDA opportunity.
That said, with better-than-expected results in managing other cash impacting items we still expect to deliver up to $400 million improvement of adjusted free cash flow in 2007. We did generate solid seasonal adjusted free cash flow of $333 million in the quarter. The third quarter adjusted free cash flow declined sequentially reflecting normal seasonal cash disbursements.
Year-to-date free cash 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; lower year-to-date capital expenditures and improved management of the balance sheet including accounts receivable and payables. As previously indicated, we are on a path toward our goal of up to $1.8 billion in adjusted free cash flow for the year.
We continue to invest in our business in a responsible manner in order to drive lower cost and increased revenue opportunity. Capital expenditures for the quarter were flat sequentially at $420 million. We believe that the slowing economy and related slowdown in real estate development has impacted our need for capital in this area. Year-to-date capital expenditures of $1.2 billion are about 5% below 2006 levels.
As Ed noted, our Board of Directors recently authorized increased capital spending directed at our deployment of “fiber to the node.” As we continue our plan of increasing the speed and capability of our network in a targeted way, we still expect our 2007 capital expenditures to be in the range of 2006 levels.
For the quarter cost of goods sold declined 30% to 38% of revenue from 40% a year ago, supported by reductions in facilities and employee-related costs. Volume declines were the leading reason for the facility cost reductions, but our initiatives for cost reductions continue to accumulate results with opportunity for further improvements.
Our employee count is down 5.5% or more than 2,000 employees from this time last year, largely through attrition, while productivity and customer service measures improve.
Selling, general and administrative expense includes the $353 million legal charge, again, primarily related to our settlements with parties who originally opted out of our shareholder litigation settlement last year. Excluding these charges, quarterly expenses would have declined 4% from the prior year, largely as a result of lower employee related costs.
Net income in the quarter was $2.1 billion or diluted earnings per share of $1.08 and was driven in large part by our reversal of the previous allowance against our deferred tax assets. While this reversal does not change the fact that we will not pay significant cash income taxes in the near future, we now expect to begin showing book taxes on our statement of operations beginning in the first quarter of 2008.
While the reversal has no immediate effect on our cash flow, it does reflect confidence in our ability to generate operating profits in the future. As such I consider it to be another significant milestone passed for Qwest. Excluding the effect of the tax benefits and the previously mentioned legal charges, earnings would have been $269 million or $0.14 per diluted share.
Finally, we continue to improve the profile of our balance sheet. With the reversal of the tax valuation allowance in the quarter, we now have a positive equity position for the first time since the first quarter of 2002. We maintained a strong liquidity position with cash and cash equivalents of $1.1 billion while continuing to make good progress on our share buyback program.
Through September 30th 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 our leverage, most likely as debt comes due and when circumstances make such an activity value created.
In fact, since the quarter end we have paid off an additional $250 million in high coupon debt, continuing to reduce future interest expense. We will enhance our financial flexibility including simplifying our capital structure and retaining a manageable maturity profile.
In summary, we are maintaining momentum in our key growth products, driving higher ARPU and improved free cash flow. We are investing our capital and expense dollars in areas where we see the best opportunity for returns and are continuing to improve the competitive cost structure of our business.
With that let me turn the call back to Ed.
Thank you, John. I can ensure that as we complete our strategic review, identifying the opportunities for future value creation, Qwest will continue to focus on its operations day in and day out. We will take advantage of opportunities for revenue growth and employ cost and capital discipline to drive margin and free cash flow improvement.
Our leadership at Qwest knows that this ongoing day-to-day blocking and tackling under our plan is 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 and with the discipline that you've come to expect as we move forward through the rest of this year and into the future.
With that we'll be glad to take your questions.
(Operator Instructions) Your first question comes from John Hodulik with UBS.
John Hodulik - UBS
Thanks. Good morning. Just a couple of quick questions on the fiber to the node plan. I think, either Ed or John, you mentioned an additional 1.5 million homes added with the $300 million spend. It just seems to suggest that you have some “fiber to the node” in the network now in the number of homes hooked up already? Could you sort of discuss that?
And then I think, you have about somewhere between 10 million and 12 million total homes in your region. What's the plan going forward? Obviously this is a fairly small percentage of the total, where do you expect to eventually get to and over what time period?
Just a quick corollary 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 are there other services like video that you believe that you'll eventually be offering, services on top of as well?
And then lastly with the CapEx. I heard you say it should stay about $1.6 billion, but based on spending in '07 it looks like about $800 million, or half as you say in the release, is going towards broadband now leaving only about $800 million in maintenance capital. It would seem to suggest that you expect to be able to cut that by about $300 million and I'm just wondering sort of what are the areas there? Is it economic driven or are there other areas you can cut?
I'll take the first part and then John can talk about the CapEx that we've provided for you. Fiber to the node is almost exactly what you said here. We are investing fiber to the node, so we have multiple homes passed today that have various speeds associated with it.
Our goal is to solidify and say to the market as well as to our customers that we are going to bring 20 MB of speed to your home. We are not having a new video strategy; we're staying with DIRECTV. We will take advantage of any products or services that will come over higher speed, even maybe backhaul opportunities.
So that's what our fiber to the node strategy is. We're spending somewhere probably between $70 million and $100 million this year on “fiber to the node.” So if you took 100 just at the top end here we're incrementing $200 million. We really believe this is the responsible way to get our bandwidth to our customers and there will be multiple services that will come over that.
So that's our thinking here. I think it's a very responsible way to do it. We will be planning marketing programs and testing along the way of all the fiber we have out there or even the copper that will serve closer in. And we will then adjust our plan going forward. On the CapEx spend, I'll turn that over to John.
Sure, John. Good morning. As we've indicated in the press release in the past, we spend a significant amount of our capital budget on putting higher speeds into the network. And this year it's over half of our capital spend. And as Ed has indicated, about $70 million to $100 million of that is driven by our specific “fiber to the node” strategies.
Going forward, I think it's probably look premature to talk about how that mix might change. We haven't completed our budgeting process for 2008, but that being said, clearly as we are moving from our traditional telephone type business to a data and IP world, increasingly we'll be focusing our capital expenditures on improving speeds into our network.
Your next question comes from the line of Jonathan Chaplin with J. P. Morgan.
Jonathan Chaplin - J. P. Morgan
Good morning. If I could just follow-up on the last question. I think, Ed, you said you're looking at this as a $200 million incremental spend on fiber to the node. So should we think of that as $200 million in incremental CapEx for 2008 in total, so that putting CapEx somewhere between $1.8 billion and $1.9 billion for 2008?
And then following up from that, given that broadband growth is really beginning to slow for you I think broadband net add sell looked a little light this quarter. How do you think about getting a return on this invested capital that you are pouring into broadband? If you're not doing video, what are you getting incrementally for all of spend?
And then finally, I think the outgoing management team hinted fairly strongly that a dividend was on the way. And we obviously didn't get a dividend at the last Board announcement and then we hear today that the CapEx is going to be potentially higher next year. How should we relate those two data points? Is part of what's driving your decision not to pay a dividend your outlook that capital spending has 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 to that. So when we get to that, we will. And we will do our entire CapEx plan based on our 2008 strategic review and where we had.
I would say to you that the return model, it's our belief that there will be plenty of products and services that will flow over high-speed bandwidth. So to have it pinned down to one or the other we really believe that this is a prudent spend so we wouldn't share our return factors on that. We think it will be the right thing to do actually for our investors, shareholders, employees going forward and our customers.
On the dividend, we're not going to say anymore. We're completing our strategic review, so when we get done with our strategic review our whole shareholder return strategy, which would have a piece of dividend potentially or maybe not, and would have our debt and as far as our investments how we would see that. It's premature and we think that a shareholder return strategy follows our strategic review and we will have that later.
Jonathan Chaplin - J. P. Morgan
Ed, if I could just follow up on that. One of the hallmarks of the Dick Notebaert era that I think investors really liked was his insistence that if an incremental dollar of CapEx was going to go into the ground he'd have to be able to demonstrate to investors in a very clear way exactly how the return on that investment was going to be realized.
So it definitely makes me a little nervous that there is an expectation that there will be just in a very general sense new products and services that will help generate a return on this invested capital, as opposed to a very clear and precise perspective of exactly how the return is going to be realized. Thank you.
Your next question comes 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 been interesting to you, surprising to you about the lessons from the retail industry that you think you could apply to the telecom sector in terms of competing more aggressively versus monopoly type industry a few years ago?
And one thing we haven't really talked about today is mergers and acquisitions. Is that a potential 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 there is 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're designing your own products and services, as we did at Williams Sonoma, you were forced to really view it through the customers' eyes. You couldn't just start from what you wanted somebody to have, and that does go back on the fiber to the node build. We have to be ready to have speed. And Jonathan, to your point, we will be disciplined, but I can't give you all the products and services today that would be put on there and I think it would be crazy to think I knew them all.
We have a good strategy and we know our network has to be able to carry that. And that's what I learned in retail. So to that degree that's where we are. Now help me with the 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 of building shareholder wealth. That's one reason we are wanting to complete our strategic plan. And I want to review all the activity that's either been done or could be possible in front of us and get that done sooner than later so we know how to go forward. And so that would be part of a strategic review definitely.
Simon Flannery - Morgan Stanley
And are you planning to have this done by year-end?
Your next question comes from the line of Chris Larsen with Credit Suisse.
Chris Larsen - Credit Suisse
Actually, first is a clarification from John. The $2 billion that you're recognizing today in the NOL, the tax benefit, is that in addition to the 4Q recognition on FIN 48 or is that 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 come up, can you give us an idea of the size of the onetime settlements or the impact 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 other on volume versus price? Thanks.
Sure Chris. First of all, I think on the tax benefits you have to try to kind of delink the FIN 48 accounting and the recognition of the valuation allowance on deferred tax assets. They were two distinct accounting treatments; the FIN 48 stuff was recognizing tax benefits that we would be able to more likely than not receive and the recognition of the valuation allowance on deferred tax assets is that we have confidence in our earnings stream going forward and we could utilize the NOLs.
As it relates to the wholesale side, as we mentioned the onetime settlements were in the access side of our business, actually it's kind of a perfect storm type thing. We had a benefit in the second quarter and a hurt in the third quarter that were about equal size. So those two items together were the principal reason for the drop in our access revenues.
And lastly, as it relates to the wholesale, we have experienced losses from industry consolidation all through the year. I think that going forward our goal here is to continue to replace that lost revenue with higher map margin reseller and data and IP revenue, and obviously to date we have not been able to completely replace it. Our goal is to continue to strive to try to replace that in the future, Chris.
Chris Larsen - Credit Suisse
And John, if I could just clarify one more thing on the NOLs, that's really helpful. I have just under $7.5 billion of NOLs left and that would get you through about, again depending on how well things go between now and then, through about 2010 without paying taxes, is that right?
Our NOLs are, I think into 10-Q we indicate that there are $7.2 billion and I don't think it's up to me to try to project for when we'll utilize them.
Your next question comes from the line of David Barden with Banc of America.
David Barden - Banc of America
Good morning. I guess two questions; first, just as the stock is flirting with a 52-week low here at the open. It reflects obviously a greater level of uncertainty about where the business is going then than there's probably been in a year, even when there wasn't a CEO here.
And it seems to be in part driven by the fact that there's the strategic review, which is kind of coming at the end of the year, but I think a big part of the sense in the market is that you're the only new guy there and that all the people that kind of 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 so significant, that it's worth kind of taking this six month period to kind of not talk to the market and go into a review mode and really reassess everything that the business is doing.
It creates uncertainty and any kind of interim review you could give us now, beyond spending $200 incremental million on fiber would be pretty helpful I think for people because as you appreciate there's a real concern that the lack of a dividend and potential investments in fiber could amount to a total unwinding of the cash flow story that Qwest used to be.
So I think that's the fear in the market and if you could talk to that that would be really helpful. And I think second would be just on the litigation payments, John, could you talk about the payment schedule for that? I know the original settlement had multiple payments, when is this 350 going to come due? Thanks a lot.
Okay, David, I'll take that. I appreciate what you said; that's kind of the theme of the questions. Jonathan was on the same thing. Yes, I am the only new guy here, I guess that's true.
We were at a plateau here where we were moving and the prior periods got us in better position with our free cash flow, we're not doing anything going forward other than announcing the $200 million “fiber to the node” that really is any different than we've been doing before.
I get the uncertainty, I appreciate that, but I think I'd rather live with uncertainty and then give a strategic review time to go. I mean, I think it's reasonable to think that coming in late of August and having a strategic review of where we are by the end of the year is prudent.
I get that there's uncertainty. I don't think that the “fiber to the node” announcement really is any different than we've been doing other than we've escalated it a bit. We have invested $70 million to $100 million this year. We squeezed our capital program to put into the new products and services; we are not abandoning the Networx products.
So I think overall we're not really executing any different than we did before. I get that the cloud’s over there, I understand that, we're willing to put up with that. I think we will continue to give news as we get it.
I mean you could say just hold all your decisions to the end, but we know we want to get going in our network. So, under my direction, as we learn something we give it to the market, that's what I like to do and I don't like to hold it until some bigger plan; life doesn't work that way.
You have to go along as you go, and I want to give it to you earlier than later, and if that's causing uncertainty we will deal with that, I will tell you straight up what we're trying to do and we will continue that way over time.
So that's the best I can do. I get the uncertainty, but I think this is a prudent way to run the business. We have a good management team here; we're not going off and doing something crazy, I'm not sending them in different directions. I think they've executed well, I think the beauty of where this company is, it has established free cash flow and the certainty of the free cash flow is being acknowledged.
I think the opt-out litigation is a good thing. I think the ability to reverse our NOLs is an incredibly powerful signal that people besides us think this company will make money, and we'll be in a great position. So I hope that helps you.
David Barden - Banc of America
Well Ed, if I could maybe just one more follow-up on that would be at this point in the review, started in August, now we're in October, presumably directionally speaking you've got a sense as to whether this company was kind of a modest growth cash flow focused story that had gotten its balance sheet in order and was looking to reward equity holders with the cash flow at the margin. Is there reason to believe that under the Ed Mueller regime that story is going to radically change?
I don't know. Until I finish my strategic review my goal here is to build shareholder return through whatever means we can do that. I wasn't here under the model you talked about or how that was put out.
I think it's premature to expect that while I'm going through the strategic review that we would have limited it to one or two elements of the shareholder return to our people. So I guess there's more to come, David. I'd like to tell you more, but I'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 comes up later today and I have our disclosures around the litigation and I would refer you to that. As it relates to the timing of the payments, it's not our intention to make disclosure about that.
Your next question comes from the line of Frank Louthan with Raymond James.
Frank Louthan - Raymond James
Good morning. On the buyback, just a quick question there. It did not make a whole lot of progress here. Is there a change of opinion here on the buyback or was there anything going on looking at M&A or something that would have precluded you from being in the market? Your stock was down during the quarter; it seemed like an opportunity to exercise on the buyback.
And then on the carrier side on the wholesale revenue, can you give us a little more color on exactly where this is running off? Is this some of the BellSouth revenue that you've been generating in the past that maybe is falling off a little bit faster? And is this kind of the first shoe here, or are there going to be more carrier slips for several quarters, I mean a more prolonged thing? We've already seen most of the declines in the carrier revenue here? Thanks.
Frank, first of all, on the share buyback program, we continue to execute up against that program 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, so we've continued to march there. It's our intention to complete that program within the two-year time frame.
As it relates to the wholesale revenue, our challenge here is that not only do we have some consolidating effects this quarter, but as the industry continues to consolidate, I think that it's inevitable that we'll just have some additional losses due to the industry consolidation.
But our goal here is to be able to replace that revenue with higher margin rebiller revenue or data and IP revenue, and I think that's where we've really just fallen behind a bit here. In the future it's our goal to do that. And Roland Thornton and his team are dedicated to that and are working day in and day out to make that happen.
Okay, we have time for one more question.
Your next question comes 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. If you could sort of look at the $400 million from before hand in terms of the year-over-year increase and now at $250 million. Is all of it revenue shortfall from the expectations and then just taking a margin off that revenue? Or were there costs and investments that you're making in addition that are diluting that cash flow?
And then secondly, and this is related, you mentioned about industry consolidation affecting the wholesale 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 if you could talk about the potential headwinds you see heading into 2008 from some of the after affects of that integration? Thanks.
There's a lot of ups and downs, but I mean in large part it's revenue related. We thought that we were going to grow our revenues slightly driven by improved revenue trends in 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 are around 60%, so this is largely a revenue related issue for us.
As it relates to wholesale, I think what I've indicated here in the last few comments around wholesale, I really don't have much more to add to it. We've had the consolidation, there very well could be further consolidating effects, and we have to get to it here and be able to drive revenue growth in other areas.
Let me just conclude. I understand the frustration that you're putting out here. I get that you'd like us to or me personally to give you more answers and I'm holding until the end of the year.
I appreciate your patience. I do think this is the right way to go. I think these few months that we're going to take this in we're executing our business 99% of the way we've always done it, so I know there will be a little impatience, I understand the frustration. But I think a complete holistic plan from a new CEO is the right thing to do, and personally it makes me feel like we will give the best shareholder returns by taking this little breather in how I'm looking at the business.
So with that I hope you stay with us. We're going to produce; we're going to have a great company. The company will take what's been accomplished in the last four or five years, which has been enormous, and we're going to make the best of it.
So with that, I know there are lots of calls going on further today, but we will terminate this conference call.
This concludes today's Qwest third quarter 2007 earnings investment community conference call.